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

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 nonresident entities providing digital services to Sri Lankan consumers via electronic platforms.

- By Suresh R.I. Perera

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

Registration Thresholds: