Sri Lanka’s Digital VAT from October 2025: Implications for Non-Resident Service Providers and Platforms

Background

Following the Covid-19 pandemic, there has been a significant surge in demand in Sri Lanka for services delivered via electronic platforms. This growing consumption of digital services includes services provided by non-residents via electronic platforms. In response to the rapid growth and economic significance of the digital economy, many jurisdictions have introduced indirect taxes, typically value added tax (“VAT”) or goods and services tax (“GST”) targeting cross-border digital services. Sri Lanka has now joined this global movement.

Overview of Sri Lanka’s Digital VAT Framework

The introduction of VAT on digital services was a key tax reform in the Sri Lankan Budget Proposals for 2025. Legislation has now been enacted to give effect to this reform. Accordingly, the “supply of services by a non-resident person through an electronic platform to a person in Sri Lanka” is liable to VAT in Sri Lanka.

• Enabling Legislation: Value Added Tax (Amendment) Act, No. 4 of 2025.
• Effective Date: The legislation imposing VAT on supply of services by non-resident persons through electronic platforms will take effect from October 1, 2025.
• Registration Threshold: The value of the taxable supply of good or services (other than financial services) must exceed LKR 15 million per quarter or LKR 60 million over a 12-month period to meet the standard threshold for VAT registration in Sri Lanka.
• VAT Rate: The standard VAT Rate applicable in Sri Lanka is 18%.

Scope of Taxable Digital Services

The intent of this legislation is to impose VAT on services provided by non-resident persons to Sri Lankan consumers via electronic platforms, irrespective of whether such non-resident persons have fixed places of business in Sri Lanka. This is an application of the destination-based principle of taxation, which is aligns Sri Lanka’s VAT framework with international norms for taxing the digital economy.

To operationalise this regime, the legislation introduces several key definitions:

• Electronic platform: “means, any procedure in the form of a website or mobile application used by one or more service providers to provide their services to the service recipients”.
• Non-resident person: “means, any person who occasionally undertakes transactions involving supply of services, whether as principal or agent or in any other capacity, but who has no fixed place of business in Sri Lanka, and does not include a person registered under section 10, where such person carries on or carries out a taxable activity in Sri Lanka without a fixed place of business but having an agent to act on behalf of such person as referred to in section 55”.
• Fixed place of business: “means, a place which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs”.

Who Is Liable?

Non-residents providing services to Sri Lankan consumers via electronic platforms will be liable to VAT in Sri Lanka at the rate of 18%, provided they exceed the applicable VAT registration threshold.

The statutory definition of an “electronic platform” is broad and functionally framed, capturing a wide spectrum of digital service models. This includes streaming services, Software-as-a-Service (“SaaS”), online marketplaces, mobile apps stores, accommodation and transportation aggregators, cloud infrastructure and online gaming platforms.

Ambiguity In the Legislation

Non-resident service providers may adopt diverse business models when delivering services via electronic platforms. Services may be provided via an electronic platform owned or controlled by the non-resident or its corporate group (“Direct Service Provider Model”). Alternatively, services may be provided via an electronic platform that acts as an online marketplace, which acts as an intermediary between the underlying supplier and the end consumer (“Marketplace Model’).

Recognising the difficulties in implementing VAT on digital services, particularly in the context of the Marketplace Model, jurisdictions such as the European Union, Australia and New Zealand have legislated to assign VAT liability to the digital platform through which online sales are effected. However, as of now ambiguity remains as to whether VAT obligations in Sri Lanka would be imposed on the underlying non-resident service provider or the platform acting as the marketplace.

Compliance Obligations for Non-Resident Service Providers

Under the VAT Amendment Act, any non-resident person providing services in Sri Lanka via an electronic platform is required to pay the applicable tax for the relevant taxable period in such manner as may be prescribed by the Commissioner General of Inland Revenue. Furthermore, the statute provides that where such tax is not paid, it shall be deemed to be in default, and the person liable to pay such tax, and where there is more than one person, each such person, shall be deemed to be a defaulter for purposes of the Act.

The procedure for registration, charging, collection and filing of returns has not been specified by the Commissioner General of Inland Revenue as of yet.

What This Means For Non-Resident Service Providers

For non-resident service providers, this would means carefully reviewing the pricing of services to account for the VAT burden. It also requires integrating the Sri Lankan VAT component into existing systems, which may already be managing tax obligations across multiple jurisdictions. Further, non-resident service providers must take proactive steps to register for VAT with the Department of Inland Revenue of Sri Lanka, as failure to comply may attract penalties.

What This Means For Sri Lankan Consumers

With the introduction of VAT on digital services supplied by non-residents, Sri Lankan consumers should expect potential price increases for services accessed via electronic platforms. Service providers may revise prices not only to account for the 18% VAT in Sri Lanka but also for the associated compliance costs. As a result, the overall cost of streaming, software subscriptions, online marketplaces, and other digital services could rise, impacting consumer budgets and spending habits.

Next Steps For Non-Resident Service Providers

Non-resident service providers seeking to comply with Sri Lanka’s VAT framework should consider the following steps:

• Consult with professional advisors to assess the applicability of VAT in Sri Lanka to their business model and offerings.
• Register with the Department of Inland Revenue, if liable for VAT in Sri Lanka.
• Update pricing and invoicing systems to reflect VAT liability in Sri Lanka.
• Adapt customer identification systems, to accurately determine customer location and ensure Sri Lankan VAT is applied at checkout stage.
• Implement internal processes to manage timely payment of VAT and filing of periodic VAT returns.
• Monitor guidance and updates issued by the Department of Inland Revenue to stay current with any administrative or interpretation changes.

Concluding Remarks

The introduction of VAT on cross-border supply of digital services in Sri Lanka reflects the global shift towards modernizing tax regimes in response to the accelerated growth of the digital economy. Non-resident service providers should proactively prepare to ensure compliance and mitigate the risk of penalties.

It is important to note that the legislation is still evolving. Detailed guidance on procedural aspects of compliance is yet to be issued by the Commissioner General of Inland Revenue, and further amendments to the VAT Act may follow as the regime is implemented.