By Vipula Wanigasekera –

Dr. Vipula Wanigasekera

The Sri Lankan government’s 2025 budget proposal to impose a 15% tax on income earned from services provided overseas has sparked widespread debate. Effective from April 1, 2025, the tax is positioned as a fiscal measure to boost government revenue. However, this move has raised concerns among online professionals and freelancers who contribute significantly to foreign remittances.

The budget allows a tax-free allowance of Rs. 1.8 million annually (Rs. 150,000 per month). Given the country’s inflation rate and rising living costs, this threshold is seen as inadequate. In today’s economy, Rs. 150,000 offers limited financial flexibility, making it difficult for professionals to sustain themselves without incurring additional tax burdens.

Taxing individuals who earn above Rs. 500,000 monthly might be justified, as it ensures higher-income earners contribute to national revenue. However, for the tax to be effective, it must strike a balance—high earners should not feel compelled to relocate to more favorable tax environments. If structured appropriately, this policy could retain skilled professionals while contributing to the economy.

A major drawback is that online operators might register businesses in tax-friendly jurisdictions like Dubai or Singapore, thereby avoiding Sri Lankan tax obligations. If foreign income earners opt for this route, remittances into Sri Lanka could significantly decline, counteracting the government’s revenue expectations.

A critical concern is how the government will allocate the collected tax revenue. If the funds are directed towards loss-making state enterprises like SriLankan Airlines rather than productive economic development, taxpayers may resist compliance. A transparent and efficient use of the tax revenue is essential to gain public trust and ensure meaningful national progress.

To better understand the potential consequences of this tax, it’s worth examining how other nations handle similar taxation policies.

Singapore: While Singapore taxes residents on global income, it offers exemptions for foreign-sourced income if it is not brought into the country. This model encourages professionals to retain overseas earnings without directly impacting local tax structures.

Dubai (UAE): The UAE has become a global hub for remote workers and freelancers due to its 0% personal income tax policy. Many professionals from high-tax countries relocate to Dubai to legally avoid taxes, a trend that Sri Lanka might inadvertently encourage if taxation policies are too restrictive.

India: India taxes foreign income for residents but offers various deductions and exemptions for foreign remittances. The government encourages professionals to bring money back into the country by providing tax incentives, rather than penalizing them outright.

The new tax has triggered significant backlash, particularly among digital entrepreneurs and youth-driven industries. Many YouTubers and online content creators, who previously supported the government, have openly criticized the move, arguing that it penalizes innovation and discourages digital entrepreneurship. This growing dissatisfaction could negatively impact the ruling party’s popularity, especially among younger voters who form a substantial part of the electorate.

There is speculation that the 15% tax is a requirement under the International Monetary Fund (IMF) reform package. While the IMF often recommends taxation measures to improve fiscal health, governments have the ability to negotiate terms to ensure they align with national economic interests. Sri Lanka could have explored alternative solutions such as progressive taxation structures or incentives to retain foreign income within the country.

The 15% tax on foreign income aims to enhance revenue collection, but its broader economic and social consequences cannot be ignored. If the policy is poorly implemented, it may encourage capital flight, reduce remittances, and stifle the digital economy. To mitigate negative effects, the government should consider raising the exemption threshold, ensuring productive utilization of tax revenue, and offering incentives for professionals to keep earnings within Sri Lanka. Drawing lessons from other countries, a balanced approach to taxation is essential to sustain long-term economic growth while maintaining public confidence.

*The writer is Former Diplomat, Head of Tourism Authority/CEO SLCB, Currently lecturer ECU. Youtuber , Meditation and Reiki Healer