Don’t eviscerate precious goose

Thursday 27th February, 2025

The proposed 15% services export tax exemplifies Sri Lanka’s deceptive taxation policy. The NPP government’s Budget 2025 has listed it as a corporate tax, but according to a Bill seeking to amend the Inland Revenue Act, the new tax will apply to all individuals who provide services to external parties and earn foreign exchange. Not even freelancers will be spared. The tax in question will apply to money brought back to Sri Lanka through the banking system.

The services export tax is bound to hinder Sri Lanka’s forex inflow and deliver a crippling blow to the country’s budding tech industry. It may drive Sri Lankan IT professionals working for foreign firms and bringing much-needed forex to park their earnings overseas and/or use informal forex transfer systems such as Hawala and Undiyal bypassing the banking system.

The living conditions of many Sri Lankans who have gone overseas for employment, for want of a better alternative in view of the current economic crisis, are far from satisfactory. Most of these workers are doing odd jobs or have fallen prey to racketeers, as evident from the predicament of dozens of Sri Lankans trapped in the cyber slave camps in Myanmar. Therefore, it defies comprehension why the Sri Lankans earning foreign exchange and helping shore up the country’s forex reserves, without migrating, are not incentivised to earn more in foreign currency instead of being discouraged with taxes.

The government is desperate to increase its revenue to 15% of GDP in keeping with an IMF bailout condition. But in a bid to rally popular support ahead of an election, it has proposed in its Budget 2025 pay hikes for the public sector workers and some relief measures which will take a heavy toll on the state coffers. It is also planning to expand the state service, which is already bursting at the seams, by recruiting as many as 30,000 workers. It cannot increase the existing taxes any more, and its promise to save funds by curtailing state expenditure remains largely unfulfilled. So, it has resorted to measures such as the services export tax regardless of their adverse consequences.

Some international tech companies are expanding their operations in Sri Lanka, and this means more jobs for the local youth and a boost to the country’s forex inflow. The new tax at issue is fraught with the danger of driving those companies as well as talented Sri Lankan youth out of the country. Some of these companies are reportedly planning to shift their operations to other South Asian countries which are offering numerous concessions to them. Is the NPP government promoting foreign investment in other countries? It has failed to be different from its predecessors. It has not been able to attract adequate foreign direct investment despite its braggadocio. It is upbeat about a proposed foreign oil refinery, but cannot specify the economic benefits, which, it says, will accrue to this country! It should try to increase the forex inflow through available sources such as those who work for international firms and earn in foreign currency without leaving the country. These professionals can also be considered Rata Viruwas (an honorific politicians use for expatriate workers), though based here. They deserve encouragement.

It is hoped that the government will give the proposed services export tax a rethink. It must not eviscerate the goose that lays the golden eggs. Let it be urged to explore alternative ways and means of increasing its revenue, such as downsizing the state sector and rationalising its welfare expenditure. It is reportedly planning a heavily subsidised basket of goods in view of the local government polls slated for April. This is an election bribe or chanda gundu. What has the country gained from the fuel subsidy for fishers? The fertiliser subsidy has not helped bring down the prices of rice. Paddy farmers are refusing to sell their produce to the state-owned Paddy Marketing Board, which is trying to build a buffer stock to regulate the rice market.

The Opposition has claimed during the budget debate that online casino is not taxed. If so, why has the government baulked at imposing a new sin tax to boost its revenue and chosen to commit the sin of strangling the local tech sector and driving more Sri Lankan professionals out of the country? If it manages state funds frugally and streamlines revenue collection, it will be able to reduce its overdependence on tax and tariff increases and new taxes.