Sri Lanka is taking a significant step in modernizing its tax system with the introduction of Value Added Tax (VAT) on digital services supplied by non-resident persons through electronic platforms to Sri Lankan consumers. This reform, effective from 01 October 2025, was formalized under the Gazette Notification No. 2443/30 dated 01 July 2025 and the VAT (Amendment) Act No. 04 of 2025.
This change aligns Sri Lanka with global tax trends, ensuring a level playing field between domestic and international service providers.
Who Is Affected?
Any non-resident entity that supplies electronic services to individuals or businesses in Sri Lanka via online platforms, and whose total supply exceeds:
- LKR 60 million in the last 12 months, or
- LKR 15 million in the last 3 months
is required to register for VAT in Sri Lanka.
What Digital Services Are Covered?
A broad range of digital services are captured, including but not limited to:
- Cloud computing (hosting, storage)
- SaaS (web-based applications)
- E-commerce services (payment gateways, order fulfilment)
- Digital marketing & advertising (SEO, PPC, email marketing)
- Cybersecurity services
- Streaming platforms (music, video, live content)
- IT Support & Managed Services
- FinTech services (e.g., PayPal, Stripe, crypto exchanges)
- Online marketplaces
- Social media platforms
- On-demand service apps
- Gaming and NFT platforms
- Hotel and ticket booking apps
- Subscription/membership websites
Even if a service isn’t explicitly listed, it may still be subject to VAT if it fits the definition under the Act.
VAT Registration Process
- Obtain a TIN (Taxpayer Identification Number) through the IRD e-filing system.
- Apply for VAT registration via the IRD’s online portal.
- Upon successful application, a VAT Registration Certificate will be issued.
VAT Rate and Supply Value
- VAT Rate: 18% (standard rate)
- Value of Supply: Total consideration received (excluding VAT).
If the platform only facilitates the sale (like a marketplace), the VAT is applicable only on the service fee, not the full value of the goods or services supplied by others.
Issuing VAT Invoices
Non-resident suppliers must issue Tax Invoices that comply with Section 20 of the VAT Act. A gazette specifying the updated invoice format is expected.
Filing Returns & Payment Obligations
| Obligation | Deadline |
|---|---|
| VAT Return Submission | By the last day of the month after each quarter |
| VAT Payment | By the 20th of the following month |
Returns and payments can be submitted in LKR or other approved foreign currencies. All activities must be done via IRD’s e-services portal.
Record Keeping Requirements
- Maintain comprehensive records of all supplies to Sri Lankan consumers.
- Records can be stored outside Sri Lanka, but must be retained for at least 5 years.
- Additional documentation must be produced upon IRD request.
Penalties for Non-Compliance
- 10% penalty on unpaid tax in the first month of default.
- 2% additional penalty per month thereafter.
- Maximum penalty is capped at 100% of the tax due.
- Non-compliant suppliers may face blacklisting or service restrictions.
Cancellation of Registration
A non-resident who ceases to provide digital services must notify the Commissioner General of Inland Revenue within 30 days. The IRD will issue confirmation upon successful deregistration.
Can Sri Lankan Recipients Claim Input VAT?
Yes — provided that:
- The non-resident supplier issues a valid tax invoice, and
- Legislative amendments support the input VAT claim.
Currently, this area remains subject to further clarification or future legislative updates.
Final Thoughts
With this new tax regulation, Sri Lanka follows global best practices in taxing the digital economy. Non-resident digital service providers should take proactive steps to register, ensure timely compliance, and maintain clear documentation.
Failure to do so may lead to legal, financial, and operational consequences.
For any assistance or clarification, please contact the Lanka Tax Club at info@lankataxclub.lk
Stay tuned to our updates for more tax alerts and guidance!
