• Industry warns of brain drain, reduced competitiveness
• Employment benefits at risk as taxation impacts biz profits
• Freelancers expected to adjust; broader industry feels strain
• Govt. negotiates lower tax rate, but concerns remain

Service exporters have decried the Government’s decision to impose a 15% income tax on digital service exports warning that it could impact the growth of the domestic Information Technology (IT) industry.

Speaking to The Sunday Morning Business, Information Systems Audit and Control Association (ISACA) Sri Lanka Chapter President Lakmal Embuldeniya pointed out that the decision to remove the existing tax exemption and to tax all foreign source earnings at 15% had resulted in service export companies being brought under the tax net in Sri Lanka for the first time in history.

He noted that the unintended consequence of this decision to impose a 15% tax on service export companies would be the loss of employment benefits.

“For example, an employer making a profit of Rs. 100,000 per day and allocating around 15% for bonuses and other employment benefits will lose around Rs. 15,000. The stakeholders or investors of the company may not be willing to reduce their profit and will simply omit the payment of bonuses,” he stated.

Therefore, Embuldeniya stated that more IT workers were likely to leave the country as a consequence of this loss of employment benefits. 

He further pointed out that initially, the International Monetary Fund (IMF) had sought for service exporters to be taxed at the general corporate tax rate of 30%, which the Government had managed to negotiate down to 15%.

Commenting on the decision to impose a 15% tax on individuals exporting services, which primarily includes freelancers, he stated that the forex earnings of freelancers had been taxed prior to 2017, adding that this decision was unlikely to have a major impact on freelancers.

“Many freelancers are not bringing in most of their earnings to the country anyway, excepting the amounts needed for their day-to-day needs. For instance, if a freelancer is earning $ 3,000 per month and only needs to spend $ 1,000 per month, they will only bring $ 1,000 worth of forex. In this particular instance, the freelancer will now have to bring in $ 1,150 because of taxation. 

“They will keep most of the funds outside the country, so there won’t be a significant negative impact on freelancers, since it is just a 15% tax on what they bring into the country and not on what they earn,” he stated.  

Similarly, speaking to The Sunday Morning Business, National Chamber of Exporters (NCE) of Sri Lanka Secretary General/CEO Shiham Marikar pointed out that while Sri Lanka’s IT sector represented an industry with a massive upside, developing the industry required much attention and support from the Government. 

Therefore, he claimed that the sudden introduction of tax on the industry could negatively impact its development. 

“The IT sector was identified as a potential sector when the National Export Strategy (NES) was developed a few years ago by the Export Development Board (EDB). At the time it was forecast through the NES that the IT sector would reach $ 5 billion by 2030. 

“We are not commenting on whether the tax is good or bad. Our position is that when introducing tariffs on a sector that has potential, sectoral meetings should have taken place to identify the impact of introducing this tariff, as this is a sector which will have 100% value addition in Sri Lanka,” Marikar stated.

Speaking to The Sunday Morning Business, Federation of Information Technology Industry Sri Lanka (FITIS) Chairman Indika De Zoysa said that the new tax on the IT sector would undoubtedly have an impact on the industry. 

He pointed out that the major challenge was that the digital industry was inherently “movable,” in that individuals and companies in the industry could easily shift operations abroad.

However, he conceded that Sri Lanka was not the first country to tax the IT industry. Therefore, he stated that what was required was to carry out an analysis to identify the extent of the impact of these taxes.

Furthermore, De Zoysa explained that the fallout from the introduction of these taxes could be mitigated by the introduction of financial and non-financial benefits to the industry.

“We need to figure out how other benefits can be provided to the industry. For example, if a freelancer wants to obtain a bank loan, what are the loan facilities available or are there any low-interest facilities available? Can some kind of concession be given when they are buying a vehicle?”

De Zoysa added that the IT Industry was still capable of reaching the $ 5 billion target by 2030, notwithstanding the introduction of these taxes, if Sri Lanka continued to focus on developing its digital economy. 

Speaking to The Sunday Morning Business, KPMG Sri Lanka Tax and Regulatory Division Principal Suresh R.I. Perera noted that as per the current law, there was a discriminatory tax treatment applicable to exporters of goods and services. While exporters of goods are subject to tax at 30%, exporters of services are exempted from income tax.

“This fact was highlighted in public forums about two years ago and as a result, the IMF review reports recommended elimination of the tax exemption applicable for service exporters in order to create parity with exporters of goods. 

“Whilst the elimination of the exemption was specifically mentioned in the IMF report, it did not indicate a specific rate of income tax to be imposed. The expectation was that exporters of services would also be taxed at 30%, similar to exporters of goods. However, it seems that the Government has negotiated a lower rate of 15% for exporters of services,” Perera stated.

Moreover, he pointed out that commencing from the year of assessment of 2025/2026, companies that received foreign currency income from the provision of services utilised outside the country and remitted to Sri Lanka via banks would be taxed at 15%. 

Similarly, individual service exporters will be called upon to pay income tax on foreign currency income under the progressive system up to a maximum of 15%. 

“If the individual service exporter has a mixed income – i.e. foreign currency income as well as income from other local sources – the personal relief of Rs. 1,800,000 applicable for the year of assessment 2025/2026 will be initially set off against the local income,” he said.

Perera further pointed out that foreign currency interest accruing on foreign currency deposits continued to be exempt from income tax.