The Value Added Tax (Amendment) Act, No. 14 of 2026 introduces new VAT registration requirements for non-resident digital service providers, expands exemptions, strengthens compliance measures and increases penalties for tax offences.
Sri Lanka has enacted the Value Added Tax (Amendment) Act, No. 14 of 2026, introducing a series of changes to the Value Added Tax Act, No. 14 of 2002, including revised rules for digital services supplied by non-residents, higher tax rates for specified institutions, new compliance requirements and stricter enforcement measures.
The Act was certified on 30 June 2026. Among its key measures is the extension of the effective date for VAT on digital services supplied by non-residents through electronic platforms to persons in Sri Lanka from 1 October 2025 to 1 July 2026, in line with an earlier announcement by the Inland Revenue Department.
New VAT regime for non-resident digital services
A new Chapter IIIC requires non-resident digital service providers supplying services through electronic platforms to register for VAT if the value of taxable supplies exceeds LKR 60 million in a 12-month period or LKR 15 million in any calendar quarter, effective from 1 July 2026.
Under the new rules, a recipient will be regarded as being in Sri Lanka where at least two prescribed indicators are satisfied, including a Sri Lankan billing address, payment through a Sri Lankan bank or financial institution, or the use of a device with a Sri Lankan IP address.
The Act also exempts certain digital services supplied by non-residents, including online educational services such as courses, seminars and virtual classrooms, as well as digital healthcare services, including telemedicine and AI-assisted diagnostic services.
Higher tax rate and sector-specific relief
In another amendment, the tax rate on emoluments payable to employees by specified institutions will increase to 20.5% for taxable periods commencing on or after 1 July 2026.
For film exhibition services, local authority entertainment tax may now be deducted when calculating VAT. The legislation also exempts goods and services supplied to entities approved as Businesses of Strategic Importance within the Colombo Port City.
Enhanced compliance and enforcement measures
To strengthen tax administration, all registered persons will be required to use secured point of sale (POS) machines for transactions and invoicing to facilitate real-time reporting and accurate accounting of turnover. The Commissioner-General is also authorised to publish the names, addresses and tax registration numbers of registered persons to improve transparency and support enforcement.
The Act further provides for the write-off of tax in default relating to tsunami relief projects where the Government of Sri Lanka had undertaken responsibility for the tax payments.
Stronger penalties and extended prosecution period
The amendments also introduce tougher penalties for tax evasion and fraudulent VAT refund claims committed on or after 1 October 2025. Convicted persons may be liable to a fine of up to LKR 1 million, imprisonment for up to six months, or both. In addition, offenders may be required to pay an amount equal to twice the tax they attempted to evade.
The legislation also extends the period for initiating criminal proceedings for tax-related offences, allowing action to be commenced within 12 years of the relevant act or omission.
