ECONOMYNEXT – Individuals in Sri Lanka, including freelancers who provide services to external parties and bring back foreign exchange will be liable to a 15 percent services export tax, a tax specialist said.
In the budget the 15 percent tax on services exports was listed as corporate tax but the Bills to amend the Inland Revenue Act published later showed that the tax also applied to individuals, Sarah Afker, Head of Tax Services at BDO Sri Lanka said.
The tax will apply if the money is brought back to Sri Lanka through the banking system. Up to now such incomes were exempted, to encourage foreign exchange earnings.
“From the 1st of April 2025, that particular description, as well as any other foreign source income, will be liable at 15 percent,” Afker told a post-budget seminar organized by The Economics Students’ Association of the University of Colombo.
Under changes proposed to the Inland Revenue Act on individual income tax in the income up to 1.8 million rupees is exempt from tax. The next 500,000 is taxed at 6 percent.
The earlier 12 percent tax will be removed. The next 500,000 slab is taxed at 18 percent.
Foreign exchange earnings will be at 15 percent, above the 6 percent rate without an upper limit, Afker said.
Corporates who export services are taxed only on profits after deducting expenses.
Individuals could also try to submit an income statement and charge expenses, Afker said.
The amendment on taxing foreign exchange inflows says “gains and profits earned or derived from any service rendered in or outside Sri Lanka to any person to be utilized outside Sri Lanka, where the payment for such services is received in foreign currency and remitted through a bank to Sri Lanka -15%.
And “gains and profits earned or derived from any foreign source where such gains and profits are earned or derived in foreign currency and remitted through a bank to Sri Lanka – 15%.”
Download the Inland Revenue Amendment Bill from Inland Revenue Amendment Bill from here .
What the law meant by service exports was that if a person sitting in Sri Lanka was a consultant to someone in some part of the world, where the service was used, Afker said.
Freelancers such who are doing IT work for foreign parties as well as other professional who provide services to foreign parties would fall under the category, she said.
The person was earlier not taxe if the funds were brought to Sri Lanka.
Under Sri Lanka’s income tax law that has been the case up to now.
“In a very brief period between 2018 and 2019, there was the exemption removed, but it was brought back in, because of the foreign currency inflow that it used to bring in,” Afker said.
The International Monetary Fund had proposed a 30 percent tax for service exports, government officials said, which had been negotiated down to 15 percent.
Sri Lanka has to go to the IMF often because the central bank prints money to suppress rates triggering forex crises and then ad hoc tax changes are made, critics say. Sri Lanka first started going to the IMF in the 1960s, as money was printed to re-finance rural credit.
Later money was printed by to suppress rates including by sterilizing foreign reserve sales, and in some years the interest of Treasury bills bought by the central bank was also taxed and new money taken out, analysts who studied past monetary accounts have found.
Recent currency crises have come from flexible inflation targeting through a mid-corridor or single rate, largely through open market operations to operate an ‘abundant reserve regime’ with excess liquidity.
Flaws in the operating framework of the central bank were then blamed on ‘imports’ and the ‘trade deficit, in a regression to classical mercantilism and the ‘current account deficit’ as services trade picked up pace. (Colombo/Feb25/2025)