The Inland Revenue Department (IRD) of Sri Lanka has rolled out a significant tax reform under the Value Added Tax (Amendment) Act, No. 04 of 2025. Starting October 1, 2025, non-resident entities supplying digital services via electronic platforms to Sri Lankan consumers will be required to register, collect, and remit VAT at a flat rate of 18%.
Broadening the VAT Base
By making non-resident providers responsible for VAT on business-to-consumer (B2C) transactions, Sri Lanka is broadening its tax base to include the rapidly growing digital economy. This initiative aims to ensure foreign digital service providers contribute their fair share to public revenues, creating a more level playing field for both local and international providers. However, these new rules apply only to VAT and do not extend to income tax or the social security contribution levy.
Types of Digital Services Covered
The new regulations define “taxable supply” broadly, going beyond traditional digital goods. It captures a wide range of services such as (not confirmed yet):
- Streaming music and video
- Mobile apps and software
- Digital images
- Online gaming
- Automated e-learning platforms
- Search engines
- Online advertising
- SaaS (Software as a Service) and cloud-based software
- E-commerce marketplaces
- Ride and home-sharing apps
- FinTech solutions
- Social media platforms
- On-demand services
- Blockchain and NFT platforms
Marketplaces that facilitate third-party digital sales are also required to collect and remit VAT, unless they act solely as payment processors.
VAT Rate and Registration Threshold
A single 18% rate applies to all covered digital services, simplifying compliance compared to countries with tiered rates. Non-resident providers must register for VAT if their Sri Lankan B2C sales exceed:
- LKR 60 million (approx. US$195,000) in the last 12 months, or
- LKR 15 million (approx. US$49,000) in any three-month period.
This threshold is relatively low in the context of global digital tax regimes, meaning many small and medium-sized foreign providers will need to comply.
Payments and Currency
Non-resident providers must collect VAT at the point of sale and remit it to the Commissioner General of Inland Revenue by the 20th day of the month following each quarter. Payments can be made in LKR or other approved currencies. Foreign currency payments may bring exchange rate complexities at different transaction stages.
VAT Returns and Record Keeping
Returns must be filed electronically on a quarterly basis by the last day of the month after each taxable period, using the IRD’s e-services portal. Providers are also required to maintain records for at least five years, even if those records are stored outside Sri Lanka. While this supports compliance, auditing records across jurisdictions may present challenges for tax authorities.
Penalties for Non-Compliance
Non-compliance can lead to penalties for late payment or reporting failures. The IRD can impose service restrictions or even blacklist non-compliant providers from the Sri Lankan market. Although these measures are intended as strong deterrents, actual enforcement—especially against global companies with no physical presence in Sri Lanka—may prove difficult.
The system relies heavily on voluntary compliance by non-resident entities, who must obtain a TIN and complete VAT registration via an online portal.
Dispute Resolution
Resolving disputes involving non-resident entities with no local presence could be complex. The mechanisms for challenging VAT assessments or enforcement actions may be limited in cross-border contexts.
Consumer Impact
The new 18% VAT is likely to be passed on to end consumers, raising the cost of digital services in Sri Lanka. This could generate some consumer dissatisfaction or lead to workarounds to avoid official channels.
Adapting Billing and Accounting Systems
Non-resident providers will need to quickly adjust their billing and accounting systems to accurately comply with these new obligations.
How Sri Lanka Compares: Asia-Pacific VAT/GST on Digital Services
| Country | Rate | Applies to Non-Resident Providers? | Registration Threshold | Key Notes |
|---|---|---|---|---|
| Sri Lanka | 18% | Yes (from Oct 2025) | LKR 60m / ~$195,000 | B2C; wide scope; marketplaces liable |
| Australia | 10% | Yes | AUD 75,000 | B2C; “Netflix tax” since 2017 |
| New Zealand | 15% | Yes | NZD 60,000 | Digital services, app stores, software |
| Singapore | 8% | Yes | SGD 100,000 | Overseas Vendor Registration |
| India | 18% | Yes | None | OIDAR rules; all must register |
| Indonesia | 11% | Yes | IDR 600 million | Appointed via tax office |
| Japan | 10% | Yes | JPY 10 million | Cross-border digital supply |
| South Korea | 10% | Yes | KRW 30 million | Digital goods/services |
| Thailand | 7% | Yes | THB 1.8 million | Wide digital scope |
| Malaysia | 8% | Yes | MYR 500,000 | Digital services tax since Jan 2020 |
| Philippines | 12% | Yes (proposed/enacted) | PHP 3 million | Implementation pending/finalized |
| Vietnam | 10% | Yes | VND 1 billion | From Aug 2023; portals for foreign providers |
| Taiwan | 5% | Yes | TWD 480,000 | B2C only |
| China | 13% | No (for non-resident B2C) | N/A | Only local; B2B importers self-account |
| Hong Kong | N/A | No VAT/GST | N/A | No GST/VAT regime |
| Macau | N/A | No VAT/GST | N/A | No GST/VAT regime |
| Pakistan | ~15–19% (varies) | Yes/varies | None | Provincial sales taxes on digital; patchwork |
| Bangladesh | 15% | Yes | None | Digital services liable; all must register |
Conclusion:
Sri Lanka’s VAT reform extends the tax net over foreign digital service providers, aligning with over 120 countries globally. While implementation and enforcement may present challenges—especially with large global platforms—this move marks a major step in taxing the digital economy and ensuring fairness between local and foreign suppliers.