Sri Lanka has announced a series of tax reforms through proposed legislation published on 21 February 2025. The changes, affecting VAT and income tax, will be implemented in phases from April 2025.

A key measure is the introduction of an 18% VAT on digital services supplied by non-resident providers to Sri Lankan consumers, effective from 1 April 2025. The Simplified VAT (SVAT) scheme will be abolished and replaced with a VAT refund system from 1 October 2025.

Other VAT-related changes include an increase in the contribution to the VAT Refund Fund from 6% to 10% and the mandatory electronic filing of VAT returns from 1 July 2025. VAT exemptions will apply to chemical naphtha used in electricity generation and locally produced liquid milk and yogurt.

However, the VAT exemption for the import of aircraft engines and spare parts will be repealed upon enactment.

On the income tax side, a 15% concessionary corporate tax rate will be introduced for foreign service providers from 1 April 2025. Meanwhile, the corporate tax rate for betting, gaming, liquor, and tobacco businesses will increase from 40% to 45%.

The advance income tax (AIT) on interest income will also rise from 5% to 10% from the same date.

Additionally, the period for claiming income tax refunds or credits will be reduced to 30 months for tax years beginning on or after 1 April 2024.

Some of these tax measures were initially proposed by the president in Parliament on 18 December 2024. The government aims to enhance tax collection, improve compliance, and adjust policies to current economic conditions.

Earlier, The President of Sri Lanka presented a series of tax reform proposals to Parliament on 18 December 2024, with several changes set to take effect in 2025.