- International digital companies in Sri Lanka are exempt from taxes
- They take millions of dollars out of the country every year
- Local companies offering the same services subject to taxes
- The Central Bank of Sri Lanka is aware of this inequality
- Direct debit from non-domiciled companies is no longer a choice but a necessity
- Indian policy makers have won this battle and can we too
by Sanath Nanayakkare
FITIS, the voice of Sri Lankan information and communication technology industries, urges the government to subject foreign digital companies operating in Sri Lanka to a local regulatory system where they are liable for taxes and other regulations like their local counterparts.
“Besides the lack of fair play for local businesses, these foreign digital operators bring millions of dollars out of the country every year. In a situation where Sri Lanka is running out of dollars to buy essentials like medicine, fuel and food and where banks are unable to issue dollars to students taking foreign exams, can we we can no longer afford this outflow of currencies for services consumed locally? asks FITIS. .
The Digital Section of the Federation of Information Technology Industry of Sri Lanka (FITIS) says the recent imposition of taxes by the government is understandable in the current circumstances at this critical stage of nation building . However, there are other factors that need to be considered and changed if we are to move forward with the digital economy connected to digital platforms, they say. can streamline all of our economic activities while being a leveler that democratizes opportunity. However, if we do not treat all actors on the ground in the same way, it can create inequalities, monopolies and lead to heavy losses for the economy.
Here are some comments made by Channa de Silva.
“A viable and healthy ecosystem for startups and entrepreneurs to exist requires rules and regulations that ensure fair play, especially when competing against global giants entering local markets. Therefore, a level playing field for all is an urgent need in this particular sector, and one of the ways to achieve this is to place foreign digital companies operating in our markets under a local regulatory system where they are accountable taxes and other regulations. For example, well-known foreign digital operators who run carpooling and freight transport in Sri Lanka, use our road networks, fuel subsidies and state infrastructure to grow their business, but they have an unfair advantage over their local counterparts who pay taxes.
“Foreign players have benefited from this tax haven for many years, which is a good case study of a lack of fair play for equivalent local operators in the industry. These operators, by refusing to register as local entities, do not respect any of the laws of Sri Lanka and avoid paying local taxes. They operate under the mistaken impression that they are not required to pay taxes in the areas where they operate, outside of their country of origin. However, it is a position that has been challenged by countries like India who have won the battle to be treated as equals.
“The fact that India has long struggled with the issue of taxation of foreign digital services is well documented in the media. They were the first to introduce a digital tax called “equalization tax”, in 2016, which was payable by Indian residents for online advertising services purchased from non-resident companies. Later, the equalization levy was extended to include a 2% levy on all online sales of goods or services in India by non-resident e-commerce operators.
“The Reserve Bank of India (RBI) had ordered foreign payment companies to locally store data on all transactions made in India from October 15, 2018. Thus, global payment companies have to pay around 15% tax on their income in India, as they set up servers locally to comply with the RBI directive on data storage. India’s central government has gone further by imposing a 2% digital services tax on all trade and services from foreign e-commerce companies through their Finance Bill 2020-21. With this, even companies like Walmart-owned Amazon, Flipkart, and others with an annual turnover of ₹2 crore or more operating in India became liable to tax. The expanded equalization levy became applicable from April 2021 to a range of digital services, including non-resident e-commerce operators involved in the online sale of goods and provision of services.
“The G20 summit and the meeting of the Organization for Economic Co-operation and Development held in October 2021 made another foray into global tax rules. As a result, it was decided to ensure that foreign multinational companies pay at least 15% of their total revenues in the countries in which they operate, which means that companies like Microsoft, Google, Amazon, etc. would pay a 15% tax for their transactions. in India.”
“Subsequently, India and the United States have agreed that the equalization tax currently in force for companies based in the United States will count as a credit on future taxes. March 2024 or when the global tax law comes into force.In the meantime, India continues to levy the 2% equalization tax in the form of credits.
FITIS is of the opinion that it is high time for Sri Lanka to emulate India’s regulatory policy. Channa de Silva says: “It is vital for a country like ours, which depends almost exclusively on foreign investment to progress, to recognize the importance and impact of the economic support provided by local businesses. A good step in this direction would be to admit that currently there is no level playing field between international digital companies and local companies, businesses and startups. International digital players in Sri Lanka are exempt from taxes, while local businesses that offer the same services are subject to taxes – more so than before in the current economic crisis.
“The Central Bank of Sri Lanka was aware of the inequality as it highlighted it in its 2019 report which states that “gig platforms, which operate globally despite being based in one country particular, are difficult to control by the regulatory environment of the host country. and the tax system in the absence of local business registration. On the other hand, local platforms are subject to regulatory control and are liable for local taxes. Such differences in regulatory applicability will not ensure a level playing field for local operators.
“Taking steps to put in place regulations to tax non-domiciled businesses is no longer a choice but a necessity. In addition to ensuring a level playing field and level playing field for local digital players, it will save us much needed dollars to support the people of this country,” said Channa de Silva.