Colombo imposes a new tax on service exports
From April, the Sri Lankan government will introduce a 15% tax on income from the export of services, affecting freelancers and companies that work with foreign clients. The measure aims to increase tax revenue and strengthen control over foreign currency flows, but it also risks incentivising informal transactions.
Colombo (AsiaNews) – Starting in April, Sri Lanka will introduce a new 15% tax on income from the export of services, affecting professionals in the technology sector, financial consultants, accountants and software experts who work with foreign clients.
While the government aims to increase tax revenue to address the economic crisis, the taxation could push professionals to seek alternative solutions, reducing the official flow of foreign currency into the country.
The measure, introduced in the budget law upon approval by Parliament, marks the end of a tax exemption that had been introduced in 2020. Although it was then progressively abolished between 2022 and 2023, it remained in force for external services.
The new tax legislation will affect freelancers, companies and YouTubers with foreign currency income, who will now have to register with the Inland Revenue Department (IRD).
According to Nihal Wijewardana, deputy commissioner of the department, ‘only those who provide services from Sri Lanka to foreign clients will be subject to the tax’, adding that ‘freelancers must be aware that their income from multiple organisations is classified as business income’, but they are entitled to deduct a portion of the expenses incurred to carry out the activity.
The tax authority will be able to monitor financial flows through the International Transactions Reporting System (ITRS), a mechanism already in use by the Central Bank of Sri Lanka (CBSL).
Through this system, banks are required to report foreign currency transactions, including those of freelancers, to monitor spending levels and identify potential tax evaders. A regulatory update on 21 May 2024 also granted the IRD the power to monitor a whole series of financial activities.
However, the introduction of the new tax has also generated concerns among professionals in the sector. Menuka Tennakoon, Harshani Wickramasinghe and Ashen Kodippily, three computer engineers, expressed their fears to AsiaNews: ‘With the current economic crisis and the high cost of living, we cannot survive on our salary. We provide our services to foreign clients precisely to earn foreign currency, which we can save and use when we need it. If this tax system is introduced, we have no choice but to resort to informal transaction methods because we may not have much income left after paying a hefty tax.’
The adoption of unofficial payment channels, such as the hawala and undial system – widespread in South Asia to avoid bank records – thus risks increasing tax evasion.
Lawyers Achini Mendis and Dinuk Samarawickrama have warned that ‘attempts to evade taxes using cash transactions are considered criminal offences under various provisions of the Penal Code. Furthermore, tax evasion does not fall under the statute of limitations and the penalties are extremely high.
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04/08/2016 11:05
07/04/2016 21:14
