News
Parachute tourists carry on booming businesses in the South and East
More and more foreigners on tourist visas are setting up unauthorised businesses on Sri Lanka’s Southern and Eastern coasts, operating freely outside of the tax net.
They are also routing their earnings around the local financial system, further eroding any benefits the country may accrue from this fast-spreading brand of “tourism”.
Among the main areas where tourist visa-holders are setting up restaurants, guesthouses, yoga camps, surf schools, and similar facilities are Arugam Bay, Ahangama, Unawatuna, Weligama, Mirissa and smaller villages in between. Many of these are seasonal, with entrepreneurs landing in Sri Lanka to take advantage of the spike in arrivals and returning to their respective countries till the next cycle starts. The Sunday Times interviewed hospitality industry entrepreneurs who run licensed businesses in these areas. They expressed frustration at the blatant abuse of local laws, including immigration rules, by these “parachute businessmen masquerading as tourists”. But the majority did not wish to be quoted for fear of reprisal.
The information, therefore, was verified with multiple sources but names are protected. All provided strikingly similar accounts and opinions. And they universally said they were not against foreign-owned or foreign-run businesses provided they followed local laws, paid their taxes and dues and promoted a level playing field instead of the status quo now observed.
In Arugam Bay, a leading cause for concern was Israeli tourists who run surf schools and restaurants. In the South, in addition to Israelis, there was also a reference to “draft-dodging Russians” who live in Sri Lanka to avoid being recruited in the war against Ukraine. Their main income was to lease properties and to sublet them, creating an informal guesthouse network that they market to tourists who typically make payments abroad.
Sri Lanka Tourism Development Authority (SLTDA) knows of the proliferation of unlicensed businesses, its chairman Priantha Fernando said. He recently accompanied Tourism Minister Harin Fernando to Arugam Bay where this issue was strongly highlighted by local entrepreneurs running by-the-book enterprises.
The SLTDA is yet to conduct a survey to quantify how many foreigners on tourist visas were running businesses. But the regulator is aware of the multiple facets of the problem and will address it with the relevant agencies, Mr. Fernando pledged.
“It is expanding rapidly because there’s no control of it,” said Prithvi Virasinghe, who owns ‘Spice Trail’ in Arugam Bay and Ahangama. “A lot of people came here during COVID and didn’t leave. They saw the benefits here and decided to stick around and figure out something to do.”
The easiest way is to rent a property and sub-let it. “Once you take that step, you’re competing with local tourism,” he continued. “But for that, you need to register a company, obtain a trade licence and have audited accounts. There is a framework but it is not followed. And local businesses, which have survived all the hardships, now suddenly have to face this huge unfair competition from entities that are not contributing to the overall growth of the area.”
The Israelis like Sri Lanka because of the surf, he said. “They have been coming here for years,” he pointed out. “Some old school guys have been here 10-20 years and run businesses. But there’s also a whole bunch of new school people who set up surf schools, photography schools, yoga schools and so on, which are unregulated.”
Several sources said the Israelis throw massive all-you-can-eat and all-you-can-drink parties. Fridays are “Shabbat” nights. “Firstly, these things are super fun if you’re invited to them,” one narrated. “Secondly, you have rabbis and everyone else walking around, just filling your glasses with booze. The food is super good, super tasty. All of it is done really well but they have no liquor licences and there’s no regulation.”
Others pointed out that many of these tourist-run businesses also import their labour including waiters, cooks and busboys. The only domestic hires are a few area inhabitants that they might require in order to navigate the local politics.
“Even legitimate Israeli businesses bring down Israeli workers on tourist visas to construct their buildings,” one Weligama-based industry consultant said.
Some tourist-run surf schools deprive local surfboard hirers of income by bringing their own equipment. And if a luxury surfing retreat costs between US$ 1000 and 2000, that fee is paid abroad and is inclusive of the three meals (provided, again, by tourist visa-holders), accommodation and equipment while the traveller might bring around US$ 500 for sundries expenses here. Even that is exchanged for Sri Lankan rupees at unauthorised dealerships–essentially, “shops”–and does not enter the financial system.
A majority of these illegal businesses take only cash payments. We asked whether they kept the dollars under their mattresses. “Literally,” replied the consultant, “Literally.”
Contrast this with a legitimate business that has been set up with “the greatest difficulty” (because of the red tape and extensive official delays at multiple levels).
Mr. Virasinghe pays personal and corporate tax, excise and trade licence fees, the environmental protection area licence fee, fire safety licence fee, Road Development Authority dues for signage and the SLTDA development levy. He also makes Employee Provident Fund and Employee Trust Fund contributions and has erected water recycling facilities to comply with required hotel standards. None of these applies to the illegal businesses.
Another operator said he used to run a restaurant whereby he would claim a 10 percent service charge, 15 percent VAT, two percent nation-building tax, and 1.1 percent tourism development levy on top of the menu prices.
“A legitimate business would pay 26-27 percent on top of its base rate,” he explained. “If a business is not legitimate, it’s only paying a 10 percent service charge, and that, too, goes to its staff. So why should we pay 25 percent to the Government when we can do it the way they do? And we can do it better because we’re Sri Lankans.”
When legitimate businesses pay taxes and tourist visa-holders running unauthorised ventures do not, it is equal to the former-subsidisng the latter, sources observed.
The sources drew clear distinctions between foreigners—many of them who arrived in Sri Lanka some years ago–who run legitimate businesses and help the development of their respective areas and these later “opportunist” arrivals.
“To be fair, there’s a mix,” one Southern resident said. “There are people who do things very conscientiously, the initial set, who followed the regulations correctly. But as it develops, a lot of things that have been happening recently are unregulated. There are smaller fish in the biggers cheme of things, too, like models, photographers, DJs, all working on tourist visas.”
“When I travel abroad on holiday, it’s not even on my horizon to think about working there,” she said. “But we see these guys come here and it’s completely their world–like it’s here for them to take as much as they want. And if they’re giving back and doing it in the right way, obviously, that’s fine. But I think a vast majority isn’t.”
Like others, however, she pointed out that neither the existing regulations nor the infrastructure is helping the situation. “It’s almost like a free hand to do whatever they want,” she said. “And doing the right thing is hard and complicated, not easy and not straightforward. A lot of friends say even setting up a bank account here is hard.”
When local offices–top to bottom–and red tape make it agonizingly difficult for locals or foreigners to set up and register businesses (as well as obtain a liquor licence and fulfill other requirements), entrepreneurs are either discouraged from setting up anything or go underground. And that’s where there appears to be a system of “informal payments” to local and central Government authorities which allows the status quo to continue uninterrupted.
“It’s very difficult for people to legally come, set up and compete against these things,” Mr. Virasinghe said, adding that it took him two years to acquire a liquor licence. “And why would they? If they can subvert the rules and run without licences…why not? It’s a lot easier and cheaper.”
There was agreement that a nuanced approach was needed. The idea wasn’t to “just shut everything down” as there was considerable value added by foreigners moving to Sri Lanka and carrying out business.
“There needs to be a two-pronged approach,” another industry consultant said. “First, the government needs to make it easier for people to set up businesses in a structured way. Second, the government should clamp down on anyone not following that system. The problem would be if they only do the second and not the first.”
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