Sri Lanka’s digital tax policy sparks economic uncertainty

The Sri Lankan government’s decision to remove tax exemptions on digital service exports has sparked concerns among industry professionals and policymakers regarding its potential economic impact.

Dr. Harsha De Silva, a Member of Parliament representing the opposition party Samagi Jana Balawegaya (SJB), has criticized the policy, warning that it could threaten the country’s economic recovery. He pointed out that the new tax measures would directly affect IT and BPO companies, software firms, digital agencies, young freelancers working on platforms like Upwork and Fiverr, as well as content creators and professionals engaged in remote work for global companies.

According to Dr. De Silva, Sri Lanka’s digital services exports have grown significantly, from $321 million in 2005 to over $1 billion in recent years. He emphasized that remote work played a crucial role in sustaining the economy during the country’s financial crisis by allowing skilled professionals to earn competitive salaries while staying in Sri Lanka.

He cautioned that imposing taxes on this sector could lead to increased brain drain, as more youth may choose to leave the country in search of better opportunities abroad.

Dr. De Silva also highlighted the contradiction in government policies, stating that while Sri Lanka is promoting itself as a favorable destination for foreign digital nomads, it is simultaneously making it harder for its own citizens to work in the same field. He argued that such conflicting signals could deter investors and undermine the country’s competitiveness in the global digital economy.

The government has set ambitious targets for the IT sector, with President Anura Kumara Dissanayake aiming to expand the IT workforce to 200,000 and increase IT exports to $5 billion. However, Dr. De Silva questioned how these goals could be achieved if policies discourage digital entrepreneurship and innovation.

Comparing Sri Lanka to other nations, Dr. De Silva pointed out that many countries are introducing incentives to boost their digital economies. He warned that if Sri Lanka becomes an unfavorable environment for digital service exports, skilled professionals will likely relocate, leading to further loss of foreign exchange and talent.

Industry stakeholders and professionals affected by the policy are calling for a review of the tax measures, urging the government to reconsider their long-term impact on the digital economy and overall economic growth.