📈 New Tax Policy Threatens Growth in Sri Lanka's Service Export Sector

Sri Lanka has ended its nearly three-decade tax exemption on service exports, subjecting foreign income to a 15% tax under the Inland Revenue (Amendment) Act from April 2025. Industry experts warn this fiscal adjustment could undermine sector competitiveness, encourage brain drain, and drive transactions into the informal economy. • Sector Overview & Economic Contribution • The IT/BPM and knowledge-based services sector generates over US$ 3.00 Bn+ annually (provisional official data states US$ 3.47 Bn in service exports last year). • Employs more than 144,000 skilled professionals across Sri Lanka. • National strategic targets aim for US$ 11.00 Bn in service exports by 2030. • New Tax Framework Structure • Individual Freelancers & Professionals: Progressive rate starting with Rs. 150,000 exempt, 6% up to a 15% maximum (if remitted via local banks). • Corporate Exporters: Flat 15% tax rate on service export profits (down from initial IMF proposal of 30%). • Non-Remitted / Unverified Income: Subject to standard corporate rates up to 30% or individual rates up to 36%. • Key Industry & Economic Risks • Joint warnings from industry bodies (SLASSCOM, FITIS, BCS, CSSL) highlight risks of Sri Lanka becoming one of the highest-taxed regional jurisdictions compared to competitors like India, the Philippines, and Vietnam. • Highly mobile digital workers may adopt foreign workarounds (e.g., fintech, e-residency) or physically relocate, threatening the formal tax base. • Policy Recommendations • Gradually phase in taxes to align with long-term growth. • Pair tax policies with R&D credits and infrastructure incentives. • Establish simplified registration systems rather than expanding strict financial surveillance.