Deputy Minister of Industry and Entrepreneurship Development, Chaturanga Abeysinghe, has shared his views on the new 15% tax imposed on individuals who earn foreign exchange through online services.
In a lengthy statement on his social media account, he argued that this new tax is relatively low compared to those imposed on other professionals.
He explained that even if an individual earns one crore rupees from abroad, they would only be required to pay 1.5 million rupees in tax. He also noted that the government had reduced the originally proposed 30% tax rate to 15%.
Below is the full statement issued by the Deputy Minister:
How is this possible?
Yes, ideally, the IT sector, like the tourism industry, should not be taxed. However, under the agreement with the International Monetary Fund (IMF), the government cannot selectively reduce taxes for specific industries. Additionally, the country needs to implement a double taxation treaty, which requires a minimum agreed-upon tax of 15% on IT services. The previous government had initially agreed to a 30% tax rate.
We are all aware that IT service providers in Sri Lanka do not have the same resources as those in other countries. Issues such as infrastructure, equipment, loan access, industry recognition, and platform availability have long been challenges. Moreover, global platforms such as Uber do not pay taxes here, and in some cases, foreign countries impose a minimum tax on services provided in Sri Lanka, causing a loss of revenue.
For companies operating in this sector, taxation is not a major issue since they are taxed in the countries they operate in. Under the double taxation system, they can also claim tax deductions in the future.
The main concern arises for freelancers. Until now, foreign income earned by freelancers was exempt from taxation. However, under the new regulation, this income will now be subject to a 15% tax when filing annual income tax returns.
Most freelancers do not currently have an income tax file. However, opening one can be beneficial, as it may provide access to financial services such as bank loans, credit insurance, and professional recognition.
Freelance income falls under personal income tax regulations. Individuals earning up to Rs. 1.8 million annually (approximately $5,000) will remain tax-exempt. Beyond this threshold, the tax slab starts at 6%.
For those earning exclusively from freelance foreign income, the maximum tax rate is capped at 15%. This means that even if an individual earns one crore rupees, they will only be taxed at 15%.
In contrast, other professionals and business owners face tax rates as high as 36%, making this a more favorable tax rate for freelancers.
As many have pointed out, if even 200,000 freelancers contribute at least $5,000 annually through the formal banking system, Sri Lanka’s economy could benefit from an additional $1 billion in foreign exchange earnings. Currently, the country’s total IT revenue stands at $1.6 billion, and many freelancers earn less than $5,000 but do not remit their earnings through the banking system.
Given the current economic situation, it is important to regulate and formalize the freelance sector. Freelancers need access to global payment platforms like PayPal, bank loans, and industry recognition. These are key policies that the National People’s Power (NPP) government aims to implement. While these changes may not happen immediately, they are necessary steps for long-term growth.
To better understand the freelance sector’s economic contribution, we must systematically engage with the government. The issues affecting freelancers should be discussed with the Ministry of Digital Economy to establish appropriate policies and professional rights.
At the same time, we must agree on paying a fair tax. This is a draft bill currently under discussion, and it is time for it to be enacted into law. Taxes paid by professionals contribute to national development, not to politicians’ pockets.
This year, the government has allocated Rs. 20 crore for digital economy development. While this amount may not be significant for the IT sector, it is a step towards formalizing and strengthening the industry.
Chaturanga Abeysinghe
Deputy Minister of Industry and Entrepreneurship
