Sri Lanka's digital tax shift: Balancing revenue needs with innovation and growth

SRI Lanka is in the midst of a critical transition as it begins to reshape its tax system to reflect the realities of a growing digital economy. With rapid digital adoption across sectors from e-commerce and online advertising to streaming platforms and software-as-a-service providers it has become clear that the country’s tax regime must evolve to capture this expanding domain. In recent years, the Government has initiated a series of steps to bring digital platforms under its tax net, aligning with international trends and the country’s urgent domestic revenue needs.

- By Indika De Zoysa

One of the most notable changes was the extension of Value Added Tax (VAT) to digital services provided by foreign companies to local consumers. Global giants such as Facebook, Google, Netflix, Spotify, and Amazon Web Services are now required to register for VAT in Sri Lanka if their services are consumed domestically. This move brings Sri Lanka in line with more than 80 countries that have introduced some form of indirect tax on cross-border digital services.

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. The goal was to ensure that digital businesses especially foreign-owned companies operating without a physical presence contribute fairly to the national tax base, just like their local counterparts. At the same time, there has been increased scrutiny on Sri Lankan freelancers, social media influencers, digital marketers, and small-scale online businesses, particularly as many of these individuals generate foreign exchange earnings via global platforms.

Broader implications