From regulation to confusion: Challenges of VAT on non-resident service providers via electronic platforms

THE Value Added Tax (VAT) Amending Act No. 04 of 2025 which was certified on 11 April 2025, introduced amendments to the charging section of the VAT Act where VAT at 18% would be charged on the supply of services by a nonresident person through an electronic platform to a person in Sri Lanka, with effect from 1 October 2025. Sri Lanka has now introduced the VAT Regulation (Gazette No. 2443/30) requiring nonresident persons providing services via electronic platforms to register for VAT, charge 18% VAT, and remit it to the Inland Revenue Department (IRD).

- By Rifka Ziyard

The regulation applies to a wide range of services including:

■Cloud computing and SaaS

■Streaming services

■E-commerce platforms

■Digital advertising

■FinTech services

■Social media and content-sharing platforms

Thresholds for registration are:

■Rs. 60 million in the past 12 months, or

■Rs. 15 million in the past 3 months.

There is a common misconception that the VAT imposed on nonresident service providers via electronic platforms is a tax targeting foreign—particularly American—companies, and that it may negatively impact trade negotiations, especially with the United States. However, this view misunderstands the nature of VAT. VAT is not a tax on the nonresident service provider; rather, the provider acts merely as a collection agent, charging VAT on behalf of the Sri Lankan Government and remitting it to the Inland Revenue Department. The economic burden of the tax falls on the consumer, not the service provider.

If the policy objective is to tax the profits or revenues of large foreign digital companies operating without a physical presence in Sri Lanka, then the appropriate instrument would be a Digital Services Tax (DST)—not VAT. DSTs are designed to directly tax the gross revenues of digital multinationals, and they have been adopted by several countries as interim measures pending a global consensus under the OECD’s BEPS framework.

To better understand this distinction, Table 1 of the article provides a comparative analysis of VAT and DST, highlighting their legal, economic, and administrative differences

The challenges of taxing the digital economy. Traditional tax rules rely on physical presence to establish taxing rights, but digital businesses can generate significant revenues in a country without any local presence.

To address this, the OECD proposed a two-pillar solution: