Sri Lanka’s recent decision to impose an 18% VAT on locally produced software, effective from April 2023, marks a significant shift from its previous 0% rate. This move, part of a broader tax reform, has stirred concerns among industry insiders about its impact on Sri Lanka’s goal of becoming a tech hub akin to Silicon Valley.
Sources indicate that the CEO of a well-known taxi- hailing app company expressed concerns about the VAT, suggesting that it might compel Sri Lankan software companies to move their startups overseas, where they wouldn’t face similar tax liabilities. This sentiment is shared across the industry, with many pointing out that the VAT is just one of several factors influencing such decisions. Ongoing issues like power outages and better job opportunities abroad have been driving factors in this trend.
The rationale behind the VAT imposition and its potential effects on the IT sector have been topics of heated discussion. Some experts argue that while seeking financial equilibrium, the government must also consider the impact of such taxes on the burgeoning tech industry. They highlight that Sri Lanka’s tax policy changes have been frequent compared to other countries known for their tech industries.
For instance, tech hubs like Ireland and Singapore have thrived partly due to their favorable tax policies. Ireland’s low corporate tax rate has attracted major tech firms, while Singapore offers a variety of incentives to nurture its tech sector. These countries provide examples of how supportive tax environments can foster technology innovation and growth.
In contrast, Sri Lanka’s new VAT policy on software could potentially hinder the growth of its tech sector. Technical consultants and industry experts urge the government to focus on creating a supportive ecosystem for tech startups. This includes not only tax policies but also infrastructural support and a stable business environment. They emphasize that Sri Lanka is competing in a global market, where other countries are also vying to become IT hubs.
As Sri Lanka heads towards its next review of the VAT policy in 2024, the government faces the challenge of finding a balance. The decision on VAT will not only impact revenue generation but will also play a crucial role in determining the country’s position in the global technology landscape. The success of Sri Lanka in becoming a South Asian Silicon Valley will significantly depend on how these policies evolve and support the tech industry’s growth.
