Sri Lanka has a long-standing issue of having a small tax base while needing to support a large-State expenditure. While there has been some improvement in widening the tax base, the number of tax files the Government tracks have not significantly increased.
The Government’s decision to impose a 15% income tax on digital service exports drew warnings that it could impact the growth of the domestic Information Technology (IT) industry. Many online service providers and freelance service specialists in Sri Lanka have voiced their concern about it, with politicians and industry groups also joining in the chorus. Many have argued that this tax will discourage local entrepreneurs and may impact a growing online gig economy in which many youth are involved. While there is some truth to the concern about the tax discouraging entrepreneurs and youth who are self-employed as freelancers for foreign employers, the argument that ‘We should not have to pay taxes’ lacks merit.
According to the Colombo-based policy think tank, Arutha, the exemptions to income tax on export services will be removed from 1 April, with a 15% concessionary tax rate for individuals and companies. Earnings from services provided in Sri Lanka but used outside the country are subjected to this tax. “The elimination of the exemption was proposed in the IMF's Article 4 consultation & Second Review in June 2024, along with a VAT on digital services and increasing corporate income tax rates from 40% to 45% on industries, to compensate for shortfalls from property taxes. Freelancers who provide export services are also subject to this tax. Freelancer income is considered a business income, so business expenses such as platform fees can be deducted when calculating their taxable income. The Inland Revenue Act clarified that remittances by Sri Lankan workers in foreign countries are not subject to this tax, as they are considered non-residents under Sri Lanka's tax laws,” Arutha explained.
The move by the Government will not see a Sri Lanka-based service provider – Freelancer, taxed if their earning is below Rs. 150,000 per month. If a freelancer earns less than Rs. 233,000 per month, they will be taxed Rs. 5,000. The 15% tax only applies to the bracket over that threshold. According to Economist Umesh Moramudali, if a freelancer earns more than $ 1,000, they will be subjected to the tax, which will be around 5% of the income.
However, it is disappointing to see that some in the freelancer community complain about being taxed. We as citizens must pay taxes; it is what keeps the State financed and functioning. Freelancers were quite happy to watch from the sidelines when those who were eligible to pay income tax got slapped with a rude awakening by the previous Government. There was a necessity to increase direct taxes as State revenue was in shambles. If it was good enough to be applicable to one group in society, why not others in the same income range? We Sri Lankans long argued against paying taxes, saying that the taxpayer rupees were being abused and wasted by State sector crooks and corrupt politicians. However, the masses have voted into Parliament a new political power, which has arrived on the promise of better transparency, accountability, and to root out corruption. As such, now it is the turn of the voters to fall in line with good fiscal policies and join the tax base.
Sri Lanka has often had ‘classes’ within its society, who have often had many privileges. One such belief is that some do not, or ought not, have to pay tax. Sri Lanka can’t afford to give a selected few such privileges, given the economic crisis it is facing. Everyone needs to chip in with taxes.
It is also high time to ask, do lawyers pay tax? Or the question, do doctors pay tax? Everyone must play their part in Sri Lanka’s economic recovery, and it starts with paying taxes. What Sri Lankans should also push for is with the growth of the tax base and increase of State revenue, for indirect taxes to be reduced.