Tax Updates

Summary: Gazette Notification – VAT on Digital Services (2443/30)                                      

Issued under: Value Added Tax Act, No. 14 of 2002 (as amended)

Published by: Ministry of Finance, Sri Lanka
Gazette Number: 2443/30
Date: 31st May 2024

Key Highlights:

1. Scope of the Regulation:

   • Applicable to non-resident suppliers providing digital services to customers in Sri Lanka.

   • Aimed at capturing VAT from cross-border B2C digital transactions.

2. Digital Services Covered:

   • Software applications (including downloads and SaaS)

   • Streaming services (video, music)

   • E-books, online games, cloud storage

   • Digital advertising platforms, and other electronic content.

3. VAT Registration Requirement:

   • Non-resident digital service providers must register for VAT in Sri Lanka if they supply digital services to consumers located in Sri Lanka.

4. Tax Rate:

   • Standard VAT rate of 15% is applicable.

5. Filing & Payment Obligations:

   • VAT returns must be submitted quarterly.

   • Payment of VAT must be done in Sri Lankan Rupees (LKR).

   • Returns and payments are to be submitted electronically via the IRD portal.

6. Compliance Mechanism:

   • Simplified VAT registration process for non-residents.

   • Must appoint a representative in Sri Lanka (if necessary) for VAT compliance purposes.

7. Enforcement & Penalties:

   • Non-compliance may result in penalties, interest, and legal action under VAT law.

8. Effective Date:

   • Comes into force from 1st July 2024.

Purpose of the Regulation:

To expand the VAT base by including foreign digital service providers and ensure fair taxation between domestic and foreign digital suppliers.

Published Date : 7th July 2025

🔔 Public Notice Summary – VAT Amendments (Act No. 4 of 2025)

Issued by: Inland Revenue Department, Sri Lanka
Notice No.: PN/VAT/2025-01 (Revised)
Date: 17th April 2025
Legal Reference: Value Added Tax (Amendment) Act, No. 04 of 2025
Effective From: Various dates specified below

🟡 Key Changes Introduced:

1. VAT on Digital Services from Non-Residents

• Effective Date: 1st October 2025

• Applies to non-resident service providers offering digital services via electronic platforms to customers in Sri Lanka.

• Definitions of electronic platform, non-resident person, and fixed place are clarified in the Act.

• Registration, payment, and compliance guidelines will be issued by the Commissioner-General.

2. Abolition of Simplified VAT Scheme

• Effective Date: 1st October 2025

• Replaced by a Risk-Based Refund Mechanism for:

  • Eligible exporters

  • Suppliers with over 50% of supplies to strategic or specified projects

• Refunds to be made within 45 days from the due date of VAT return submission.

3. Zero-Rated Supply Rules Updated

• Zero-rating applies only if foreign currency payment is received via a licensed local bank within 6 months of the taxable period.

• The clause denying input tax on non-compliance is repealed from 10th April 2025.

4. Mandatory VAT Registration for Commercial Importers/Exporters

• No threshold: All engaged in commercial import/export must register under the VAT Act.

5. Certain Supplies Treated as Zero-Rated (From 1st Jan 2024)

• Employer-provided meals or transport (outsourced or in-house).

• Reinsurance commissions received in foreign currency.

• Unused government postage/revenue stamps (to face value).

6. Compulsory e-Filing of VAT Returns

• Effective Date: 1st July 2025

• Manual returns only under exceptional approval by the Commissioner-General.

7. Definition Introduced: “Unprocessed Agricultural Products”

• Includes cleaned, sorted, chilled items without full processing.

• Note: VAT on eggs at 18% continues (unrelated to this new definition).

8. New VAT Exemptions (From 11th April 2025)

• Import/supply of chemical naphtha to CEB for power generation.

• Locally produced liquid milk/yogurt (must contain at least 50% fresh milk).

9. Removal of VAT Exemption

• Aircraft engines/spare parts now taxable from 11th April 2025 (as per custom classifications).