Sri Lanka’s push to establish itself as a hub for digital products and services is gathering momentum through fresh support from Germany, but questions over new tax policies and institutional credibility threaten to undercut the opportunity.
The Export Development Board (EDB) is set to sign a cooperation agreement with Germany’s Import Promotion Desk (IPD), widening a partnership that has already helped exporters of natural ingredients and processed foods secure valuable contracts in Europe.
The deal, announced during a visit to Colombo by IPD Head Julia Bellinghausen earlier this month, promises to link Sri Lankan digital SMEs directly with European buyers through B2B matchmaking, sourcing missions and trade fair participation.
Stefan Schutze Tobar, IPD’s sector lead for digital products, toured local IT firms to assess their export potential and identify those suitable for inclusion in IPD’s buyer programmes.
EDB Chairman Mangala Wijesinghe described the agreement as an expansion of earlier successes in natural ingredients, saying it would bring institutional know-how and compliance training to local companies, while giving them access to sustainable market entry opportunities in the European Union.
This partnership comes at a time when the country’s export earnings are surging. In 2024, Sri Lanka posted a record US$16.17 billion in exports, a 7 percent increase from the previous year.
Services exports, including ICT and business process management, contributed US$3.46 billion, growing more than 8 percent year-on-year.
Momentum has continued into 2025, with total exports in the first seven months reaching nearly US$10 billion, up almost 8 percent over the same period in 2024. Services brought in more than US$2.1 billion, reflecting nearly 10 percent growth.
These figures underline the increasing importance of the services sector as a generator of foreign exchange.
Yet even as exports grow, the sector faces turbulence from the government’s fiscal agenda. The NPP administration has signaled plans to tax foreign income, including service exports, at a rate of 15 percent.
This has alarmed freelancers and small digital firms, who warn that such measures could stifle competitiveness, erode margins and drive talent overseas.
At the same time, legislation has already introduced an 18 percent value-added tax on digital services provided by non-resident companies to Sri Lankan consumers. Initially due to take effect in October 2025, the VAT has now been postponed to April 2026 after industry pushback, underscoring the tension between revenue needs and market realities.
Critics argue that while new taxes may widen the government’s income base, they risk undermining a sector that is one of Sri Lanka’s fastest-growing earners. Others point to longstanding accusations of cronyism within the EDB, warning that unless reforms ensure fair and transparent access to export promotion initiatives, the benefits of international partnerships may be captured by a narrow circle of insiders.
Sri Lanka now stands at a crossroads: the German partnership offers a rare chance to embed local digital SMEs in lucrative European markets, but the success of this initiative will depend on whether domestic policies nurture or hinder that growth.Without predictable taxation, transparent institutions, and genuine support for small and medium exporters, the country risks losing momentum just as its digital economy is beginning to take flight
