Resilient digital industry poised for growth amid policy shifts

The digital services sector in Sri Lanka has witnessed new tax measures introduced in the latest national Budget, which marks a significant shift in the industry’s financial landscape.

While these measures present challenges, the industry remains steadfast in its commitment to growth, innovation, and resilience. The Digital Economy Ministry, in collaboration with key industry stakeholders, is actively engaging to ensure that Sri Lanka remains a competitive and attractive hub for digital services, both regionally and globally.

The digital sector has long been one of the most dynamic and future-ready industries in Sri Lanka, withstanding economic crises, global downturns, and disruptive technological shifts. 

Even during the most difficult periods, such as the COVID-19 pandemic and the economic crisis that followed, the industry remained robust, leveraging innovation and adaptability to sustain growth. The introduction of new tax policies, while impacting stakeholders, is being met with a proactive approach by both the Government and industry leaders to mitigate negative consequences and capitalise on long-term opportunities.

A key aspect of the Government’s fiscal strategy has been to ensure a level playing field by requiring all companies – both local and international – to contribute to the nation’s economy through taxation. Historically, non-domiciled digital service providers had an advantage over local companies, as they were not required to pay taxes for services offered within Sri Lanka. This policy shift is expected to generate additional revenue for the Government while ensuring fairness in the market. However, concerns have been raised regarding the potential implications of increased taxation on digital exports and freelancers, as this may encourage relocation of businesses and banking operations to more tax-friendly jurisdictions.

Despite these challenges, the Digital Economy Ministry, in collaboration with key industry organisations, is focused on implementing measures to sustain and enhance the growth of Sri Lanka’s digital economy. Several strategies are being explored to provide relief and long-term benefits to industry players. These include concessionary loan schemes, investment in skill development, improved digital infrastructure, and the creation of IT parks and co-working spaces to foster innovation and entrepreneurship. Furthermore, the Government is in the process of creating a $ 50 million Fund-of-Funds to attract global investors, with the aim of supporting startups, promoting intellectual property creation, and advancing the Sri Lanka HQ strategy.

Another major initiative under consideration is the expansion of GovPay, a digital platform aimed at modernising Government payments, reducing fraud and corruption, and streamlining revenue collection. This initiative is part of the broader vision to build a cashless, digitally empowered society that ensures greater financial transparency, security, and efficiency. The Government will relaunch the QR-based payment service with an almost zero Merchant Discount Rate (MDR), along with incentives for receiving payments through digital methods and additional measures to encourage digital payments.

Looking ahead, the Government and the digital industry remain committed to achieving the ambitious targets set for 2030, with a vision of growing Sri Lanka’s digital economy to $ 15 billion and reaching $ 5 billion in digital exports. To achieve these goals, a balanced approach is required – one that ensures financial sustainability while fostering an enabling environment for digital enterprises to thrive.

Digital Economy Deputy Minister Eng. Eranga Weeraratne said: “Sri Lanka’s digital industry has always been a beacon of resilience, even in the face of adversity. The introduction of these tax policies requires us to reassess our strategies, but it also presents an opportunity to strengthen our fiscal position. The Government is committed to ensuring that the revenue generated from these measures is reinvested into the industry through initiatives such as enhanced connectivity, IT infrastructure development, and capacity building. The Government has allocated over Rs. 31 billion (over $ 100 million) for the development of the country’s digital economy in 2025. We are engaging with industry leaders to create a roadmap that balances taxation with growth incentives.”

Federation of IT Industry Sri Lanka (FITIS) Chairman Indika De Zoysa said: “The IT industry has always been at the forefront of driving Sri Lanka’s digital transformation, and while taxation introduces new challenges, it also signals the growing importance of the sector. What is crucial now is a collaborative approach where policy frameworks align with industry needs to ensure sustained growth. By fostering innovation, providing support mechanisms, and maintaining a competitive environment, we can continue positioning Sri Lanka as a regional technology hub.”

Sri Lanka Association for Software and Services Companies (SLASSCOM) Chairman Nishan Mendis said: “A thriving digital economy requires a stable and a consistent policy environment that is fair and conducive to all stakeholders. Equitable taxation is a necessary component of economic development whilst maintaining competitiveness, attracting investments, and fostering innovation. We believe a collaborative approach, where industry leaders, policymakers, and broader economic participants work together to shape solutions, is essential to ensuring that Sri Lanka remains a top destination for knowledge services and digital innovation.”

BCS, The Chartered Institute for IT – Sri Lanka Chairman Vajeendra S. Kandegamage said: “As an industry, we must acknowledge that challenges will always exist, but our focus should be on how we navigate them. By strengthening our IT talent pipeline, improving regulatory clarity, and incentivising technology-driven enterprises, Sri Lanka can continue to attract global players and nurture home-grown digital success stories. A balanced approach will ensure that the sector not only withstands external pressures but thrives in the years ahead.”

Computer Society of Sri Lanka (CSSL) President Heshan Karunaratne said: “We must take a holistic view of the digital economy’s future. Taxation is only one piece of the puzzle. To ensure sustained growth, we need targeted incentives for IT exports, support for freelancers who bring valuable foreign exchange, and a regulatory framework that encourages, rather than discourages, investment. The conversation should not just be about taxation but about how we, as an industry and a nation, can create a thriving digital ecosystem.”

As the Government and industry stakeholders continue to engage in discussions, the focus remains on ensuring that Sri Lanka’s digital future remains bright. By balancing fiscal policies with strategic investments and industry support, the country can continue to strengthen its position as a competitive digital economy.

The collective efforts of policymakers, businesses, and industry associations will play a crucial role in shaping the digital landscape of Sri Lanka in the years to come.