Some BOI-approved firms divert output, harming economy
View(s):Sri Lanka’s foreign exchange is silently bleeding as several BOI-approved companies across sectors from apparel and processed foods to plastics and palm oil exploit loopholes to sell the bulk of their production domestically instead of exporting it.
By using BOI concessions to import machinery, accessories, and raw materials duty free, these firms evade taxes, gain unfair advantages over local producers, and drain the country’s foreign reserves, Finance Ministry sources revealed.
Under Section 17 of the BOI Act, export-oriented companies may sell only 20 per cent of their production locally, with the remaining 80 per cent earmarked for export.
In practice, however, multiple firms routinely exceed this threshold. Bonded warehouses, intended to store imported raw materials tax-free until processing for export, are misused, while subsidiary trading companies distribute the products locally. “Legitimate businesses cannot compete with firms that use loopholes to evade taxes,” said a senior Trade Ministry official.
In the apparel sector, several BOI-licensed manufacturers declare exports on paper but sell the majority of garments domestically through subsidiary firms. These companies pay partial or no duties and bypass VAT, enabling them to undercut local competitors by 20-30 per cent.
Analysts warn that such practices not only distort the market but also deprive the Treasury of millions in revenue. “This is a systemic problem,” said an economist, specialising in export industries. “The BOI framework is meant to earn foreign exchange, yet the country loses both taxes and dollars every month due to these loopholes.”
The palm oil sector illustrates the scale of the issue. BOI-registered refiners, allocated export quotas under the Indo-Sri Lanka Free Trade Agreement, are meant to ship most of their production to India. Instead, many divert nearly 100 per cent to the local market. They maintain bonded warehouses and subsidiary trading companies to distribute refined oils domestically while declaring fictitious exports.
This allows them to evade 18 per cent VAT and other duties, giving them a major cost advantage over compliant local producers.
Customs data for 2025 indicates Sri Lanka imports about 20,000 metric tonnes of edible oil monthly, spending US $15-20 million per month on refined oils instead of importing unrefined oil.
Analysts say this results in an annual foreign exchange outflow of $150–200 million. “The palm oil racket is a clear example of how BOI concessions, intended to generate dollars, are manipulated for local profit,” said a trade expert.
Their impact is far reaching: coconut oil producers, small edible oil refineries, and local readymade garment producers are faced with reduced prices and decreased margins, while the Treasury loses valuable revenues.
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