News
Tax net cast on Sri Lankan professionals, freelancers earning forex for services
View(s):By Tharushi Weerasinghe and Mimi Alphonsus
Foreign exchange income earned from exported services is to be taxed, removing a longstanding exemption.
“The concessionary tax rate of up to 15% for individuals and a flat 15% for companies will come into effect on April 1, 2025, after being approved by parliament,” said Nihal Wijewardana, senior deputy commissioner, Inland Revenue Department (IRD).
According to Mr. Wijewardana, export service income refers to income earned from services rendered or performed by an individual or company in Sri Lanka or abroad, provided that the service is used outside of Sri Lanka.
Nihal Wijewardana, senior deputy commissioner, Inland Revenue Department (IRD).
A common example of such services is back-office support. Software engineers, financial consultants, architects, marketing professionals, logistics analysts, customer service representatives, supply chain consultants, and accountants earning in foreign exchange are common jobs in Sri Lanka that will be affected.
These export service providers were made exempt from income taxes during the spate of tax reliefs provided starting January 1, 2020. While most of these exemptions were withdrawn as of October 1, 2022, or April 1, 2023, the exemption for taxes on exported services was not.
Only those who provide services from Sri Lanka to overseas clients will be subject to the tax. Freelancers, in particular, need to be aware that their income from multiple organisations is classified as business income. As a result, they are entitled to deduct expenses incurred in earning this income, including capital allowances for assets used in their business.
Taxes are levied on business profits exceeding Rs. 1.8 million per year. The first Rs. 1 million is taxed at 6%, while the balance is taxed at a maximum of 15%. Companies, on the other hand, are subject to a flat 15% tax rate. In contrast, local earners face a progressive tax with rates of 6%, 18%, 24%, 30%, and 36%.
There has been concern that migrant workers may be affected by this tax, but Mr. Wijewardana clarified that they will not be.
The Inland Revenue Act differentiates between residents and non-residents where taxable income is concerned. Sri Lankans who leave for overseas jobs are considered non-residents whose taxable income only includes what arises or is derived from within Sri Lanka. Therefore, their income and remittances are tax-exempt.
The IRD relies on a self-assessment system for tax collection. Taxpayers must voluntarily register, calculate, and pay their taxes while maintaining proper documentation. All individuals over 18 years are required to obtain a taxpayer identification number (TIN), and those with taxable income must register for income tax.
Under the new policy, individuals earning foreign income who were previously unregistered must now comply with tax registration requirements.
The department has implemented extensive information collection mechanisms to detect tax non-compliance. If taxpayers fail to comply with the law, interest and penalties will be added to their outstanding tax liabilities. “Anyone receiving an income locally and not paying taxes is committing a crime,” Mr. Wijewardana emphasised.
Attempts to evade tax by using cash transactions to avoid bank records are considered criminal offences under multiple provisions of the Penal Code. Additionally, there is no statute of limitations on tax evasion, meaning legal action can be taken at any time for past offences. The Senior Deputy Commissioner said that the penalty provisions are extremely high, making it “more cost-effective to comply with tax regulations’’.
Currently, the Central Bank inspects foreign exchange flows through the International Transactions Reporting System (ITRS). Through this system, banks are required to report foreign exchange flows, including for freelance services.
Spending patterns are also monitored, which can reveal undeclared incomes. On May 21, 2024, a regulatory update was issued in a gazette, granting the IRD authority to examine bank transactions, stock market purchases, and other financial activities where necessary.
Anil Jayantha, Minister of Labour and Foreign Employment, said that even if some people hide their income abroad the government can trace them. There are plans to introduce an “automatic information sharing system,” whereby countries communicate information about companies’ or individuals’ financial activity to prevent tax evasion.
Mr. Jayantha said information sharing between IRD and the Land Registrar or Department of Motor Vehicles helps alert authorities when large purchases are made with undeclared income. 
International tax regulations are rapidly evolving to address leakages. A key focus area is illegally transferring legally earned income. Sri Lanka has access to international asset information through double tax avoidance agreements with 46 countries and one multilateral agreement with SAARC.
According to data from the Export Development Board, the service export sector in generated US$3.471 billion in foreign exchange last year with the transport and logistics sector as well as the ICT and Business Process Outsourcing (BPO) sector collectively accounting for over US$3 billion.
EDB Chairman Mangala Wijesinghe, said the real sum is likely higher since data from informal, non-registered service providers in the sector is difficult to collect.
Mr. Wijesinghe noted that the tax on exported services is less than the amount charged on exported products. “[the new tax] is significantly lower than the 30% corporate income tax applied to merchandise exports, ensuring that service exports remain competitive while contributing to the economy,” he said. “By introducing a lower tax for service exports Sri Lanka is positioning itself as an attractive destination for international investors.”
Mr Jayantha said that the original bill drafted by the former government and approved by the IMF was for a tax of up to 30% but that the NPP government is imposing 15%. “This is a reduction because the earlier draft was for 30%. All the other people in Sri Lanka are paying taxes up to 36%. But here, people who earn profits by providing services abroad will be taxed at a maximum of 15%,” said Mr Jayantha. “I urge people to not be misled by rumours and to consider their ethics. It is everyone’s responsibility to bring the country out [of its economic difficulties].”
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