Sri Lanka’s new VAT framework for Non-Resident Digital Services: What you need to know

The IRD reserves the right to enforce stringent collection measures for outstanding VAT liabilities, with continuous non-compliance potentially leading to service restrictions or blacklisting within Sri Lanka. This underscores the profound seriousness of these regulations. However, enforcement against smaller non-resident entities lacking a physical presence in Sri Lanka may present inherent challenges. The deterrent effect of “service restrictions or blacklisting” is considerable, but its pragmatic application against truly global digital platforms, especially those devoid of a physical presence in Sri Lanka, remains to be seen. Sri Lanka’s direct jurisdictional authority over such foreign entities is limited. The system heavily relies on the voluntary adherence of non-resident entities, who must obtain a TIN and VAT registration via an e-service portal

Effective 1 October 2025, Sri Lanka’s Inland Revenue Department, under the Value Added Tax (Amendment) Act, No. 04 of 2025, is implementing a mandatory VAT regime for non-resident entities providing digital services to Sri Lankan consumers via electronic platforms.

Broadening the VAT Base:

This strategic move aims to ensure that foreign digital services contribute to Sri Lanka’s tax base by placing the onus of VAT collection on non-resident providers for B2C transactions. It aligns Sri Lanka with global best practices in taxing the digital economy, fostering a more equitable playing field for both local and international service providers. Crucially, this framework currently applies only to VAT and does not extend to income tax or social security contribution levies.

Types of Digital Services Covered:

The new regulations adopt an expansive interpretation of “taxable supply”. This includes a comprehensive range of digital services such as cloud computing, SaaS, e-commerce services, digital marketing, streaming, FinTech, social media, on-demand platforms, gaming, and even blockchain/NFT platforms.

VAT Rate:

A uniform VAT rate of 18% will be leThresholds:

vied on these services. While simplifying compliance, this rate represents a notable cost implication for consumers or a potential margin reduction for providers.

Registration Thresholds:

Non-resident providers are mandated to register for VAT if their services to Sri Lankan consumers exceed Rs. 60 million (approx. US$ 195,000) within the preceding twelve months, or Rs. 15 million (approx. US$ 49,000) within the preceding three months. This threshold, while defined, is relatively modest for a country-specific digital services tax, potentially bringing numerous smaller providers into the fiscal ambit.

Payments and Returns:

Registered non-resident providers are responsible for collecting VAT from consumers at the time of supply and remitting it to the Commissioner General of Inland Revenue by the 20th day of the month following the end of each quarterly taxable period. Payments can be made in LKR or other approved currencies. Exchange rate fluctuations could introduce minor complexities for foreign currency payments. VAT returns must be filed electronically on a quarterly basis by the last day of the month after the taxable period ends, using the IRD’s e-service facility. This necessitates system integration with the Sri Lankan tax infrastructure.

Record Keeping:

Providers must meticulously maintain comprehensive records of all service supplies to Sri Lankan customers for a minimum duration of five years, even if these records are domiciled outside Sri Lanka. While practical for providers, auditing these cross-jurisdictional records may prove resource-intensive for the Inland Revenue Department (IRD).

Non-Compliance:

Non-compliance will incur penalties for delayed remittances. The IRD reserves the right to enforce stringent collection measures for outstanding VAT liabilities, with continuous non-compliance potentially leading to service restrictions or blacklisting within Sri Lanka. This underscores the profound seriousness of these regulations. However, enforcement against smaller non-resident entities lacking a physical presence in Sri Lanka may present inherent challenges. The deterrent effect of “service restrictions or blacklisting” is considerable, but its pragmatic application against truly global digital platforms, especially those devoid of a physical presence in Sri Lanka, remains to be seen. Sri Lanka’s direct jurisdictional authority over such foreign entities is limited. The system heavily relies on the voluntary adherence of non-resident entities, who must obtain a TIN and VAT registration via an e-service portal.

 Dispute Resolution:

In the event of contentious matters pertaining to VAT calculation or compliance, the mechanisms for dispute resolution with a non-resident entity lacking a physical presence within the jurisdiction could prove challenging.

Consumer Impact:

The 18% VAT will foreseeably be passed on to Sri Lankan consumers, thereby escalating the expenditure on digital services. This might engender some degree of consumer dissatisfaction or, potentially, incentivise attempts to circumvent official transaction channels where feasible.

Billing and Accounting Systems:

Non-resident providers are now required to expeditiously reconfigure and adapt their extant billing and accounting systems to ensure full compliance with these novel VAT obligations.

This comprehensive framework marks a significant step for Sri Lanka in taxing the digital economy. Compliance is paramount to ensuring seamless operations within the Sri Lankan market.

(The writer is Tax 

Principal at KPMG.)