Sri Lanka clarifies major VAT reforms introducing tax on cross-border digital services, new exemptions, a higher financial services VAT rate, stricter compliance obligations and tougher penalties for tax offences. 

RF Report

Sri Lanka’s Inland Revenue Department (IRD), on 3 July 2026, outlined sweeping changes to the country’s Value Added Tax (VAT) regime following the certification of the Value Added Tax (Amendment) Act No. 14 of 2026 on 30 June 2026.

The amendments introduce VAT on digital services supplied by non-residents, increase the VAT rate on financial services, create new exemptions and zero-rating provisions, strengthen compliance obligations, and significantly increase penalties for tax offences. While most measures took effect on 1 July 2026, some provisions apply retrospectively from 1 October 2025.

VAT extended to cross-border digital services

From 1 July 2026, VAT applies to services supplied through electronic platforms by non-resident providers to customers in Sri Lanka.

Non-resident suppliers must register for VAT if the value of their supplies exceeds LKR 60 million over any consecutive 12-month period or exceeds, or is expected to exceed, LKR 15 million in any quarter beginning on or after 1 July 2026. Registration applications must be submitted electronically within three months of becoming liable to register or the publication of the prescribed registration form.

The new rules do not apply where the recipient is a VAT-registered person in Sri Lanka. The Commissioner-General will issue further guidance on registration, tax collection and compliance.

The legislation also introduces new statutory definitions for terms including “electronic platform”, “non-resident person”, “fixed place” and “marketplace in relation to educational courses”.

New exemptions and zero-rated supplies

The amendments expand VAT relief through new exemptions and zero-rated supplies.

Services provided by garment buying offices registered under the Industrial Promotion Act to overseas buyers are treated as zero-rated supplies with effect from 1 October 2025, provided the customer is located outside Sri Lanka and payment is received in foreign currency.

From 1 July 2026, new VAT exemptions apply to supplies made to approved Businesses of Strategic Importance under the Colombo Port City Economic Commission framework, as well as certain educational and healthcare services supplied through electronic platforms by non-resident providers. Diplomatic and qualifying international organisation supplies also receive relief where provided under applicable laws or agreements.

Financial services rate rises and registration thresholds retained

The VAT rate applicable to financial services increased to 20.5% for taxable periods beginning on or after 1 July 2026. Financial services subject to this rate are exempt from the Social Security Contribution Levy.

The Government also abandoned its proposed reduction in VAT registration thresholds. Businesses must therefore continue to register if taxable supplies exceed LKR 15 million in a quarter or LKR 60 million over a rolling 12-month period.

New compliance requirements for VAT-registered businesses

The amendments introduce several new compliance measures.

VAT-registered businesses may now submit VAT schedules from the start of the relevant taxable period using RAMIS through CSV uploads, direct portal entry or API integration with enterprise resource planning systems.

Registered persons will also be required to use secure point-of-sale (POS) machines for all taxable transactions within three months of the date prescribed by the Commissioner-General, who will publish the technical specifications.

In addition, the Commissioner-General must publish the name, address, tax registration number and registration status of every VAT-registered person to improve transparency and assist tax administration.

Stronger enforcement and higher penalties

The legislation substantially strengthens enforcement provisions.

Higher penalties now apply to tax evasion, fraudulent refund claims and other VAT offences committed on or after 1 October 2025, with maximum fines increasing from LKR 25,000 to LKR 1 million in addition to tax-based penalties. Imprisonment of up to six months remains available for serious offences.

From 1 July 2026, new offences include fraudulent refund claims and failing to provide valid tax invoices or authenticated customs documents.

The Commissioner-General has also been given explicit authority to investigate VAT offences, while criminal prosecutions will be brought by the Attorney-General or authorised officers in the name of the Commissioner-General.

Other changes

Additional amendments include allowing entertainment tax to be deducted when calculating the taxable value of film exhibition services, disallowing input tax deductions on certain deferred-VAT project imports that are not re-exported within the prescribed period, writing off VAT liabilities relating to qualifying tsunami relief projects, and introducing other administrative changes to the operation of the VAT system.

Earlier, Sri Lanka 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.