Sri Lanka’s service export sector, especially its IT and freelance industries, is facing a significant challenge following the introduction of a 15% tax on services provided to international clients. Effective from April 1, 2025, this new tax policy, announced as part of the 2025 national budget, aims to boost public revenue while aligning with global digital taxation trends.
However, experts warn that the move could severely impact Sri Lanka’s foreign exchange earnings, particularly in the rapidly expanding IT services and freelancing sectors.
In a major policy shift, the government has removed income tax exemptions on export services. Previously, earnings from export services were tax-exempt, provided they were routed through the local banking system.
This exemption had spurred steady foreign currency inflows, with service export revenues reaching US$ 3.46 billion in 2024—accounting for about 21.4% of the country’s total export earnings. The sector grew by 8.51% year-on-year, demonstrating its increasing importance as a foreign exchange earner.
However, the introduction of the 15% tax has raised concerns among stakeholders. Freelancers will be exempt from tax on their first Rs. 150,000 of income, with a 6% tax on the next Rs. 85,000, and the remainder taxed at 15%.
For larger service providers, the tax could lead to reduced earnings, higher operational costs, and less competitive rates. While provisions to exempt foreign taxes aim to soften the blow, the overall impact is expected to be negative, especially for IT freelancers and service exporters.
The tax’s impact is particularly concerning for the digital economy, which has thrived on relatively low taxation, encouraging both local talent and foreign clients.
Experts argue that this new burden could discourage investment, deter freelancers from maintaining competitive pricing, and reduce overall financial incentives for those in the sector. The tax could also exacerbate Sri Lanka’s ongoing brain drain, with talented professionals potentially seeking more favorable tax environments abroad.
Former Treasury Secretary has warned that the new tax could cause a “shock” to freelancers, who are accustomed to retaining their full earnings. This, in turn, could lead many to reconsider operating in Sri Lanka and explore more tax-friendly markets. As global competition in the tech sector intensifies, Sri Lanka risks losing its edge in attracting and retaining freelance talent.
The government has defended the tax policy, citing the country’s fiscal constraints and the need for additional revenue. Cabinet Spokesman Nalinda Jayatissa explained that the measure is essential for meeting the country’s economic challenges.
However, the policy’s potential to diminish the competitiveness of Sri Lanka’s IT and freelance service sectors cannot be ignored. As the government strives to increase foreign exchange earnings, this tax may inadvertently lead to reduced participation in the sector.
According to the Sri Lanka Export Development Board (EDB), Sri Lanka’s service export revenue stood at US$ 3.46 billion in 2024. If the new tax is applied, it could result in a loss of approximately US$ 519 million, or Rs. 153.2 billion—an alarming figure for an economy struggling with fiscal imbalances.
While the tax may be seen as a necessary fiscal tool, its potential to harm Sri Lanka’s IT and freelance service sectors calls for a reevaluation of the policy.
The government must consider measures to mitigate the negative effects on the sector’s growth and competitiveness, ensuring that Sri Lanka’s service export industry remains resilient and attractive to both local and international talent.
