Sri Lanka’s government has published the Value Added Tax (Amendment) Bill, introducing changes to the VAT regime covering digital services, non-resident suppliers, registration thresholds, compliance measures, penalties, and VAT rates, with retrospective effect from 1 October 2025.
Sri Lanka’s government has released the Value Added Tax (Amendment) Bill, introducing significant changes to the VAT Act No. 14 of 2002. The amendments focus mainly on digital services, updated tax rates, revised registration thresholds, and strengthened compliance measures.
Key rate and threshold changes
VAT on financial Services
- The VAT rate on financial services will increase from 18% to 20.5%, effective 1 July 2026.
VAT registration threshold
Effective 1 July 2026, the threshold for mandatory VAT registration will be reduced.
A person must register for VAT if taxable supplies exceed:
- LKR 9 million in any single taxable period (quarter), or
- LKR 36 million in any 12-month period.
Electronic platform services
The requirement to charge VAT on services supplied through electronic platforms will apply from 1 July 2026.
Taxation of digital services (New Chapter IIIC)
The amendment introduces a new framework for taxing non-resident digital service providers.
Mandatory registration for non-residents
Non-residents supplying services through electronic platforms to persons in Sri Lanka must register for VAT if their turnover exceeds:
- LKR 36 million annually, or
- LKR 9 million per quarter.
Determining customer location
A recipient will be considered to be in Sri Lanka if two or more of the following conditions are met:
- A Sri Lankan billing address is provided;
- Payment is made through a Sri Lankan bank or financial institution;
- The service is accessed using a device with a Sri Lankan IP address.
Exempt services
Certain services supplied via electronic platforms by non-residents will be exempt from VAT and included in the First Schedule, specifically:
- Educational services (e.g., online courses, virtual classrooms);
- Healthcare services (e.g., telemedicine, AI-assisted diagnostics).
Compliance and administrative measures
Secured point of sale (POS) machines
Registered persons must use secured POS machines for transactions and record-keeping to ensure accurate reporting of turnover and VAT collection.
Input tax credits
- Input tax credits will be disallowed on plants, machinery, or vehicles imported on a re-export basis if they are not re-exported within one month of project completion.
- Retailers and wholesalers may claim deemed input tax on unsold stock held at the date of VAT registration, provided prescribed records are maintained.
Transparency measures
The Commissioner-General is authorised to publish the names, addresses, and tax registration numbers of registered persons to promote transparency and strengthen enforcement.
Tsunami relief provision
The Act allows for the write-off of tax in default for registered persons involved in Tsunami relief projects where the government had undertaken to pay the tax.
Legal provisions and penalties
Refund fraud
Penalties are strengthened for persons who:
- Willfully claim VAT refunds to which they are not entitled; or
- Provide false information to obtain refunds.
For offences committed on or after 1 October 2025, penalties may include:
- A fine of up to LKR 1 million, and/or
- Imprisonment for up to six months.
Criminal proceedings
- The Commissioner-General is empowered to investigate offences.
- The Attorney-General (or an authorised delegate) is responsible for prosecution.
- Criminal proceedings must generally begin within:
- 12 years from the date of the offence; or
- Three years from the date of tax liability determination in cases involving misrepresentation.
Local authority taxes
For film exhibition services, the Entertainment Tax charged by local authorities may now be deducted when determining the value of supply for VAT purposes.
The amendments will apply retrospectively with effect from 1 October 2025.
