By: Staff Writer
March 23, Colombo (LNW): Sri Lanka has introduced a 15% tax on earnings from service exports, including those made by freelancers and individuals providing services to international clients.
This tax, which will come into effect on April 1, 2025, will apply to individuals as well as corporations, marking a shift from the previous exemption for foreign exchange earnings.
The new tax aims to bring such earnings into the formal banking system, which had been encouraged to remain tax-exempt for foreign currency inflows in the past.
The tax is part of a broader set of amendments to Sri Lanka’s Inland Revenue Act. Under these changes, individuals’ foreign exchange earnings, including those from services rendered outside Sri Lanka, will be subject to a 15% tax if the payments are received in foreign currency and remitted through the banking system. Previously, these foreign earnings had been exempt to encourage the inflow of foreign currency.
Sarah Afker, the Head of Tax Services at BDO Sri Lanka, explained that the tax will be applicable on service exports where payment for services is received from foreign clients and remitted through a bank.
This includes professionals such as IT freelancers and consultants who offer services to clients abroad. These individuals will now be subject to the 15% tax, which will replace the previous exemption that applied to foreign-source income.
The budget also outlines adjustments to the personal income tax structure. For example, income up to 1.8 million rupees is tax-exempt, while the next 500,000 rupees is taxed at 6%. The previous 12% tax rate has been removed, and the next income slab is taxed at 18%. However, foreign exchange earnings will be taxed at a flat 15%, with no upper limit, which is higher than the 6% rate applied to domestic earnings.
This amendment is part of Sri Lanka’s ongoing efforts to align with international tax practices, particularly in response to recommendations from the International Monetary Fund (IMF). The IMF had initially proposed a 30% tax on service exports, but this was negotiated down to 15% as part of the country’s economic reforms.
The IMF has long played a role in advising Sri Lanka on economic matters, particularly during periods of fiscal crises. The country has faced numerous financial challenges, including currency and inflation issues, often exacerbated by ad hoc tax policy changes and monetary policies that have led to foreign exchange shortages.
Experts note that Sri Lanka’s frequent reliance on IMF assistance dates back to the 1960s when the government resorted to printing money to manage fiscal deficits, a practice that has continued, leading to repeated currency crises. These crises have been triggered by policies aimed at suppressing interest rates and maintaining an abundant reserve regime, resulting in excess liquidity in the market.
As Sri Lanka prepares for the new tax regime, the changes are expected to affect a wide range of professionals and businesses involved in exporting services to foreign markets. The move reflects the government’s efforts to secure foreign currency and stabilize the economy, though it may face criticism from those who view such tax hikes as detrimental to the country’s economic recovery efforts.
