VAT on digital services needs direction

With the new implementation date approaching, taxpayers, intermediaries, and global digital platforms continue to wait for the most essential part of any reform — practical, administrative guidance

Sri Lanka’s move to extend VAT to digital services supplied by non resident service providers through electronic platforms is one of the most significant tax expansions in recent years. While the policy direction is clear, the administrative communication surrounding this change has been noticeably inadequate.

The Government first communicated the technical implementation framework through Gazette Extraordinary No. 2443/30 dated 01 July 2025, issued under the authority of the Commissioner General of Inland Revenue.

Just three months later, in Public Notice PN/VAT/2025 03 dated 01 October 2025, the IRD formally announced that the Cabinet had decided to postpone the implementation date to 01 April 2026. The notice stated that:

• The original implementation date of 01 October 2025 was postponed to 01 April 2026, pending parliamentary approval.
• Legislative amendments “will be made in due course.”

Yet, crucially, the notice did not update or replace the detailed instructions issued in the July Gazette. This has resulted in an unusual regulatory gap - We have detailed rules for an effective date that is no longer valid — and no updated rules for the new effective date.

With the new implementation date approaching, taxpayers, intermediaries, and global digital platforms continue to wait for the most essential part of any reform — practical, administrative guidance.

The Gazette remains the only technical reference document. But since it is tied to a superseded date, foreign platforms, intermediaries, and professional advisors cannot rely on it with confidence.

The IRD notification was a start — but not enough

The October 2025 IRD notice served one important purpose: it confirmed the deferment and established 1 April 2026 as the new effective date, providing much needed time for implementation. However, the notice did not address the many operational questions required for compliance, including:

•  Registration procedures for non resident suppliers (including how value of supply should be ascertained)
• Intermediaries (e marketplaces) responsibilities 
• Documentation and invoicing requirements
• How payment facilitators and platforms should handle multi party transactions

These unanswered questions create uncertainty for almost all affected stakeholders.

Proactive guidance is urgently needed

Globally, when jurisdictions introduce VAT on digital services, tax authorities typically publish comprehensive guidance months in advance. This usually includes:

• FAQs
•  Registration guides
• Detailed practical 

examples

• Clarification of intermediary responsibilities
• Transitional rules

Sri Lanka, however, is nearing the implementation date without issuing any such guidance. This leaves non resident suppliers — many of whom operate across multiple VAT jurisdictions — unable to configure systems, update invoicing formats, or redesign tax processes in a timely manner.

The longer the delay, the greater the risk of:

• Non compliance
• Over collection or under collection of VAT
• Disputes between suppliers, consumers, and authorities

Without proactive communication from the IRD, the policy risks becoming a paper reform with limited real world enforceability. 

A call for administrative readiness

To ensure smooth implementation on 1 April 2026, the IRD should urgently issue a detailed implementation circular addressing:

• How non resident suppliers should register, pay, and file returns
• Clarifications or amendments to the processes set out in the July Gazette
• Updated operational instructions aligned with the deferred effective date

The IRD’s 01 October 2025 public notice was clear about the deferment. But six months later, stakeholders still lack the clarity needed to operationalise the reform.

Sri Lanka is not implementing an unfamiliar or experimental tax. Over 120 countries have already introduced VAT on digital services. The global pathway is well established — and Sri Lanka can follow it easily with timely, practical guidance.

To uphold the credibility of the tax system, support taxpayer readiness, and achieve the intended revenue outcomes, proactive IRD communication is not optional — it is essential.

The countdown to 1 April 2026 is almost over. Now, the IRD must take the next step.

(The author is Principal - Tax at KPMG and holds FCMA, CGMA FTII, ACA, MBA, B COM. Views and opinions expressed in this article are those of the author)