The announcement on reducing the service export tax rate to 15% has been identified as a shift towards supporting the industry’s long-term potential. While stakeholders have welcomed the strategy and its benefits, they have also noted the necessity of employing unified, holistic policy measures for the greater benefit of the overall export sector.
Addressing Parliament on 18 December, President Anura Kumara Dissanayake stated that the service export tax rate, previously set by the former Government at 30% during the second review with the International Monetary Fund (IMF), has been reduced to 15%.
Speaking to The Sunday Morning Business, Export Development Board (EDB) Chairman/Chief Executive Officer (CEO) Mangala Wijesinghe stated that the decision to reduce Sri Lanka’s service export tax rate from 30% to 15% marked a pivotal moment for this sector, offering a significant push to industry growth.
“This move reduces the cost burden on exporters and resembles commitment to promoting a business-friendly environment, paving the way for a range of benefits that can significantly increase the value of Sri Lanka’s service exports,” he said.
He further noted that one of the most immediate advantages of this tax reduction was the improved competitiveness it brought to key sectors such as ICT/Business Process Management (BPM), logistics, financial services, and construction.
Lowering the tax burden means these industries can offer more attractive pricing to international clients, thereby positioning Sri Lanka as a stronger player in the global market. This is crucial in retaining existing clients and attracting new ones from around the world.
“Moreover, businesses in the service sector now have the opportunity to keep a larger share of their earnings. Companies are able to reinvest in areas critical to growth, such as cutting-edge technology, talent development, or expanding their service offerings due to increased profitability. This reinvestment improves the quality of services and creates a ripple effect of growth across the economy,” he added.
Wijesinghe further noted that the reduced tax rate also addressed a major barrier to the sector’s expansion in recent years. The abrupt increase in the service export tax rate from 0% to 30% in the past acted as a deterrent, discouraging growth as well as both local entrepreneurs and foreign investors. By reversing this policy and implementing a more moderate 15% rate, the Government is signalling a shift towards supporting the industry’s long-term potential.
Service sector exports for the first 10 months of this year are estimated at approximately $ 2,860.80 million. This figure includes exports from key sectors such as ICT/BPM, construction, logistics, and financial services.
“By the end of this year, we are expecting $ 3.6 billion from these service sector exports. This adjustment is a welcome move to promote expansion and improve competitiveness in the global market,” the EDB Chairman said.
Wijesinghe also noted that as per the Government’s objective, the export income from the ICT/BPM, construction, logistics, and financial services sectors was projected to reach approximately $ 11 billion by 2030. This initiative will be important in attracting many inward investments to achieve this ambitious target.
Furthermore, it will help retain and actively engage professionals within the sector. He noted that this would encourage innovation and productivity, and ensure long-term sustainability and competitiveness on a global scale.
“Importantly, the tax reduction promotes trust and confidence among industry stakeholders, highlighting the Government’s willingness to address challenges and support this vital segment of the economy. Hopefully this renewed confidence encourages businesses that may have scaled back their operations under the previous tax regime to re-engage and expand their activities,” he said.
Crucial to focus on a policy package
The ICT/Business Process Outsourcing (BPO) sector remains a key player in services exports. The country’s ability to provide high-quality, innovative solutions in areas such as software development, IT-Enabled Services (ITES), and BPO has been identified as a notable strength within the region, resulting in its branding as the ‘Island of Ingenuity’.
Speaking to The Sunday Morning Business, cybersecurity strategist Asela Waidyalankara stated that the reduction of the service export tax could generally be viewed as a positive sign, especially considering the thriving nature of the service sector in November.
With the upcoming economic recovery and the mandate given by the President regarding sustaining the sector and reaching the export target of $ 5 billion, the services sector, particularly the ICT/BPO sector, is expected to grow further.
“While this is a positive step, it is essential to remain alert, especially regarding the ICT sector. Another aspect that can be looked at is income tax brackets. If it is possible to come together with the sector and look at viable, practical measures to retain talent, which is also of significance in order to elevate the competitive edge, it will be highly beneficial in order to build on this particular concession,” he said.
Waidyalankara further noted that simply revising one tax bracket alone might not be sufficient to ensure higher competitiveness. According to him, such an attempt should include re-examining aspects such as certain income tax brackets, vocational training, educational opportunities, and non-traditional means of integrating individuals into the ICT sector.
He further emphasised that it was crucial to focus on all these aspects as part of a policy package to understand how to sustain the sector.
“One policy measure may not open the floodgates in terms of material results; however, a sustained policy package might lead to notable momentum in the sector as well as sustainability in the long term. While the tax reduction will have an impact, the extent of the impact should be determined, given that there is a significant number of skilled people leaving the country,” Waidyalankara observed.
Moreover, in order to leverage the ICT service potential, industry associations such as the Sri Lanka Association for Software and Services Companies (SLASSCOM) have advocated tax incentives and regulatory reforms as well, emphasising the significance of introducing tax policies that encourage foreign investment and support the growth of IT and BPM companies, along with simplifying regulatory processes while moving towards export-focused strategies.
Enhancing the sector’s ability to contribute to Sri Lanka’s foreign exchange earnings and economic growth has been identified as pivotal. The estimated value of ICT exports is expected to increase by 38.04% to $ 141.39 million in November this year compared to November 2023.
Need for uniform policy measures
According to data released by the EDB, in November 2024, total exports, encompassing both merchandise and services, amounted to $ 1,269.33 million. Services exports for the month were valued at $ 326.23 million, marking a 20.89% growth from the same period in 2023.
Speaking to The Sunday Morning Business, National Chamber of Exporters of Sri Lanka (NCE) Secretary General/CEO Shiham Marikar stated that the NCE viewed the tax reduction on service exports as a positive sign, which would be beneficial to the growth of the sector.
However, he noted that there should be a uniform method that covered both sectors rather than merely one sector – especially regarding policy measures on taxes – in a manner that influenced all exporters, rather than differentiating between the service sector and the product sector.
“Having reductions for one particular sector while not making reductions in another results in a certain negative impact. The measures taken should be uniform rather than segregated, since it may lead to negative reception otherwise,” he added.
Marikar added that the move had been welcomed, especially by the services sector, given that the cost of doing business had always been high and considering that this reduction paved the way for a competitive advantage for the sector.
The export sector faces a number of restrictions, some of which have been identified as economic instability, inconsistent policies, lack of access to new markets, and shifting demand from other countries.
Addressing the upcoming initiatives dedicated to the growth of the export sector, Marikar noted that following the presentation of policy proposals for enhancing Sri Lankan exports and investments for the export sector by the NCE, the chamber was now in the process of meeting with line ministries such as the Ministries of Finance, Agriculture, Trade, and Foreign Affairs.
“We will be meeting them during the first two weeks of January in order to discuss the policy proposals provided. We are also in the process of preparing proposals for the national budget. This is not to request any incentives for the exporters, but rather to amend certain policies in a manner that is supportive of the business processes of exporters while creating a competitive advantage,” he said.
He added that there would be certain tax policies highlighted during this process as well. Despite not having been finalised yet, the NCE is in the process of working with tax consultants to identify potential tax incentives.
“For instance, we wish to seek the possibility of requesting certain tax incentives for exporters involved in research and development, encouraging further involvement in R&D-related activities,” he concluded.
Need to address merchandise sector
While the Central Bank of Sri Lanka’s (CBSL) statistics indicate that total exports have varied between $ 10 and $ 13 billion, merchandise exports accounted for a substantial share. From January to November this year, cumulative merchandise exports showed a significant growth of 6.44%, reaching $ 11,611.90 million compared to the same period in 2023.
Speaking to The Sunday Morning Business, NCE President Jayantha Karunaratne addressed the sectors which were covered by the tax reduction, while pointing to the need to focus on the merchandise sector as well.
“The merchandise sector can be considered the major sector in exports. However, the sector’s tax rate has not been reduced so far, as it is being held at a rate of 30%. The tax rate of the services sector – including mainly the ICT sector – which used to be at a lower rate, was raised to 30% a few years ago; this has now been reduced to 15%.
“Services sector exports amount to $ 3 billion per annum, while the merchandise sector accounts for nearly $ 13 billion. Therefore, we are looking for a tax reduction in the merchandise sector as well. We have been lobbying for a reduction in the tax structure for the merchandise sector, which has not been addressed thus far,” he added.
In terms of concerns of exporters, many stakeholders have noted that eliminating the existing Simplified Value-added Tax (SVAT) scheme would impose a substantial cash flow strain. Addressing the beneficial revisions made so far for the growth of the export sector, Karunaratne highlighted the decision made by President Dissanayake on the continuation of the SVAT beyond April 2025.
“The President has stated that the SVAT will not be removed from 1 April 2025 and will instead be continued. This will benefit the merchandise sector to a certain extent. However, a proper date of implementation appears to be pending, as the original plan was to remove the SVAT scheme from 1 April 2025.”
He further emphasised that in order to develop the export sector’s growth and reach targets set by the authorities, it was necessary to remain competitive, a factor that was lacking predominantly due to the high cost factor. He also noted that it was essential to produce innovative products going forward, along with new technology investments.
In addition to taxes, many elements contribute towards the cost factor, such as high electricity and fuel prices, which are comparatively expensive in relation to those of regional competitors. Without new investments, new technology, innovative products, and cost-effective production, enhanced growth and achieving set targets will be challenging, making it crucial to address these aspects as well.