Sri Lanka’s digital tax dilemma: Balancing IMF demands and election allies

By Sanath Nanayakkare

The government of Sri Lanka is navigating a precarious fiscal tightrope as it has proposed a new tax targeting individuals earning foreign revenue through digital services, a move aimed at bolstering state coffers but risking alienation of a key voter base.

With the International Monetary Fund (IMF) urging reforms to meet a critical revenue-to-GDP ratio, the government has unveiled a tax proposal set to take effect from April 1, 2025. However, the plan has sparked fierce backlash from digital professionals, including freelancers, IT consultants, and remote workers, who warn that the levy could drive an exodus of talent to countries with more favorable tax regimes.

Amid ongoing discussions on the topic, Dr. Harsha Subasinghe, Chairman-CEO of CodeGen and Member of the Port City Commission, expressed concern during a Hiru TV interview yesterday about Sri Lanka’s abrupt hike in digital service tax from 0% to 15%. He warned that this move risks destabilizing the tech industry and driving professionals abroad.

“These professionals are vital to our economy, generating foreign exchange through hard work, strategic marketing, and established global business ties,” he emphasized.

When questioned on why he had not raised the issue directly with the President, Dr. Subasinghe noted, “The Finance Ministry is hyper-focused on meeting IMF conditions to secure scheduled tranches. But what happens if our top USD earners depart? Today’s IT worker here could be in Singapore tomorrow. Many firms have already relocated overseas, and past waves of emigration saw one million professionals leave. This tax could trigger another exodus—there’s little incentive to stay.”

Highlighting broader opportunities, he pointed to AI’s projected USD 2 trillion contribution to the world economy by 2030.

“If Sri Lanka captures 1% of that, we will be able to earn USD 20 billion. But to do that, we need IT talent here. Instead, policies like this risk driving them away,” he said.

However, Professor Anil Jayantha Fernando at a press conference last month emphasised that this particular tax has been misinterpreted, leading to misconceptions in society.

He clarified that the taxation system applies to all income earned within Sri Lanka, whether the source is domestic or international. However, he highlighted that relief measures have been introduced for those earning from digital services compared to other sectors.

“There has been debate about a 15% tax on service exports, with some believing it is an entirely new tax. Under the Income Tax Act, everyone is subject to income tax. However, individuals earning less than Rs. 150,000 per month will be fully exempt from income tax starting in April, regardless of their industry,” he explained.

Speaking further he said:

“If an individual earns Rs. 200,000 per month from providing digital services abroad, the first Rs. 150,000 is tax-free. The remaining Rs. 50,000 falls within the Rs. 85,000 tax bracket, taxed at 6%, amounting to just Rs. 3,000. While other entities face income tax rates of up to 36%, those in the digital services sector are capped at a maximum of 15%. This provides a relative advantage rather than imposing an additional burden. So, the new tax structure is not an unfair imposition but rather a step toward a more balanced taxation system.”