Foreign Income Tax in Sri Lanka: Gross or Net?

You invoice a foreign client for USD 1,000. The platform takes its cut. The bank shaves off a transfer fee. What actually reaches your account is maybe USD 870. So when the tax bill comes, do you pay on the full USD 1,000 or on the USD 870 you walked away with?

It is one of the most common questions freelancers ask about foreign income tax in Sri Lanka, and the honest answer has a twist. You end up taxed on the net. But not in the way most people assume, and not automatically.

Let me walk through how it actually works, because getting it wrong costs you money in one of two directions.

Are you taxed on the gross or the net foreign payment?

You are taxed on the net. In tax language, on your "gains and profits."

Under Section 6(1) of the Inland Revenue Act, a freelancer's earnings are business income, and business income means your revenue after allowable business costs. Platform fees and bank charges are allowable business costs. So once you subtract them, the amount left is what you pay tax on.

Here is the twist though. The law does not simply look at what landed in your bank and tax that. It starts from the gross invoice, treats it as your revenue, and then lets you deduct the fees as expenses. The net is where you arrive, not where you start.

Why does Sri Lanka start from the gross amount?

Because the law treats your freelance work as a business, and every business is taxed on revenue minus expenses, not on whatever happens to be left in the account.

Your gross invoice is your revenue. The platform commission is a cost of earning that revenue. The bank fee is a cost of collecting it. Both are real business expenses, but they are expenses, not invisible reductions. The tax system needs you to show them as expenses so they can be deducted under Section 11(1), which allows costs "incurred in the production of income from the business."

Think of it like a shop. The shop is taxed on its sales, then deducts what it paid suppliers. It is not taxed only on the cash in the till at closing time. Your freelancing works the same way. The invoice is the sale. The platform and the bank are your suppliers.

Which fees can you deduct, and which you can't?

The test under Section 11(1) is simple: was the cost incurred to produce your income? If yes, it is deductible.

The line sits between business and personal. Section 10(1)(b) blocks "domestic expenses," your meals, ordinary clothing, commuting from home. If a cost is part of earning the income, it is in. If it is part of living your life, it is out. For mixed costs like a home internet connection, you apportion and claim only the business share. We cover the full list in our guide on what expenses freelancers can deduct.

When is the income counted, the invoice date or the payment date?

The invoice date. This trips up a lot of freelancers.

Freelancers account on the accrual basis under Section 21(3). That means income is counted when it becomes receivable, the moment you are entitled to the payment, which is normally when you invoice or complete the work. Not when the money actually arrives.

So an invoice you raise in March but get paid for in April belongs to the earlier tax year, the one in which you became entitled to it. The cash arriving later does not change which year it falls in.

The same logic sets your exchange rate. Under Section 26(6), you convert the foreign amount to rupees at the Central Bank of Sri Lanka spot rate on the date the income is taken into account, which for you is the invoice date. Not the day the dollars hit your account. If the rupee moved between those two dates, the invoice-date rate is the one that counts. Our guide on the exchange rate for foreign income goes deeper on this.

What does this look like with real numbers?

Say that over the Year of Assessment 2025/2026, your foreign invoices add up to a gross of Rs. 6,000,000 (each one converted at the CBSL rate on its invoice date). The platforms took Rs. 600,000 in commissions across the year, and bank and processor charges came to another Rs. 60,000. That is Rs. 660,000 of deductible fees.

Your qualifying service export income is taxed at the 15% maximum rate (foreign currency, remitted through a bank), and you get the Rs. 1,800,000 personal relief. Watch the difference the fee records make.

Same work. Same money in your pocket. The only difference is whether you kept records of the fees. Claiming them saved Rs. 99,000, which is exactly 15% of the Rs. 660,000 in fees you actually paid.

What happens if you don't record your fees?

You pay tax on money you never kept.

The platform's cut and the bank's fee left your hands before you saw them. But if you cannot show those amounts as expenses, the IRD has no reason to subtract them, and your business income defaults to the gross. You are then taxed on income the platform already took from you.

There is no separate "net receipt" rule that quietly does this for you. The deduction is something you claim, backed by a record. No record, no deduction. This is the single most common way freelancers overpay on their foreign income at the 15% rate, and it is entirely avoidable.

How do I keep gross, fees, and net straight?

The mechanics are not hard, but they are fiddly across a full year of invoices. For each payment you need the gross in foreign currency, the CBSL rate on the invoice date, the rupee gross, the platform fee, the bank charge, and the net. Multiply that by dozens of invoices and a spreadsheet starts to creak.

So, gross or net? You are taxed on the net. But only because you start from the gross and claim the fees back. Keep the records, use the invoice-date rate, and the net is what you pay on. Skip the records, and you hand the IRD a slice of money the platform already took. The choice, and the Rs. 99,000, is yours.