Sri Lanka Imposes 18% VAT on Cross-Border Digital Services Provided via Electronic Platforms

What’s Changing: VAT Expansion to Cross-Border Digital Services

Sri Lanka is expanding its Value Added Tax (VAT) regime to include digital services provided by non-resident companies through electronic platforms to non-VAT-registered (B2C) consumers within the country. In practice, overseas vendors must register for VAT in Sri Lanka as their services are now taxable there.

Timeline for VAT on Digital Services

The new VAT rules on cross-border digital services will take effect from October 1, 2025.

Definitions Under Sri Lanka’s New VAT Rules

On April 11, 2025, the Parliament of Sri Lanka approved the Value Added Tax (Amendment) Act No. 04 of 2025, introducing significant changes to the VAT Act No. 14 of 2002.

The Amendment imposes an 18% VAT on the supply of digital services by a non-resident person through an electronic platform to a person in Sri Lanka, effective from October 1, 2025.

The Amendment Act introduces several key definitions, including:

• An “electronic platform” means any procedure in the form of a website or mobile application used by one or more service providers to provide their services to the service recipients.
• A “fixed place” means a place that is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services or to receive and use services for its own needs.
• A “non-resident person” means any person who occasionally undertakes transactions involving the supply of services, whether as principal, agent, or in any other capacity, but who has no fixed place of business in Sri Lanka, and does not include a registered person in Sri Lanka, where such person carries on or carries out a taxable activity in Sri Lanka without a fixed place of business but has an agent acting on their behalf.

Who Must Register for VAT in Sri Lanka?

Foreign digital service providers selling into Sri Lanka will be required to register for Sri Lankan VAT and collect the tax on their sales to local users. Once registered, a non-resident must charge the standard VAT rate (18%) on digital service fees and remit it to Sri Lanka’s tax authorities, similar to local suppliers.

Electronic marketplace facilitators will likely become liable for reporting VAT on their third-party sellers. However, the Inland Revenue Department is expected to provide more detailed guidance on how these provisions will be implemented in practice.

This new regulation will require non-resident sellers to charge, collect, and remit VAT on a broad range of digital services, including streaming music and video, apps, online gaming, automated e-learning, search engines, SaaS, etc.

Services Affected by Sri Lanka’s Cross-Border VAT

B2C vs B2B VAT Treatment in Sri Lanka

Business-to-Business (B2B) transactions will operate under the reverse charge mechanism. This reform aligns Sri Lanka with over 120 other countries that have implemented similar tax measures on digital services provided by non-resident entities.

Preparing for VAT Compliance in Sri Lanka

From a tax perspective, foreign digital service providers must prepare for VAT registration and compliance in Sri Lanka to ensure a smooth transition by the October 1, 2025, deadline.

FAQs: Sri Lanka’s Implementation of VAT on Non-Resident Digital Service Providers

1. When will Sri Lanka’s 18% VAT on cross-border digital services take effect?

The new VAT rules will be effective from October 1, 2025.

2. Who needs to register for VAT under Sri Lanka’s new rules?

Non-resident digital service providers supplying services to non-VAT-registered customers in Sri Lanka must register for VAT.

3. What digital services are subject to VAT in Sri Lanka?

Services such as streaming, online gaming, mobile apps, SaaS, search engines, and automated e-learning provided to consumers are subject to VAT.

4. How will B2B digital service transactions be handled under the new VAT rules?

B2B transactions will fall under the reverse charge mechanism, where the Sri Lankan business customer accounts for VAT.

5. What happens if a foreign digital provider fails to comply with the VAT registration?

Non-compliance can result in penalties and enforcement action by Sri Lanka’s Inland Revenue Department.

6. Are electronic marketplace facilitators responsible for collecting VAT?

Yes, marketplace operators may be liable for reporting VAT on sales made by third-party sellers, pending further guidance from tax authorities.

7. Does Sri Lanka’s VAT reform align with global digital service taxation trends?

Yes, Sri Lanka’s move aligns with over 120 countries that have implemented similar VAT/GST measures on non-resident digital service providers.