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Foreign digital services will have to pay 18% VAT from October: IRD
View(s):By Tharushi Weerasinghe
The Inland Revenue Department (IRD) will begin implementing the April VAT amendment on foreign digital services in October, following a six-month delay prompted by legal and industry concerns, officials confirmed.
Starting October 1, 2025, the Sri Lankan government will enforce an 18% Value Added Tax (VAT) on digital services provided by non-resident companies to local consumers, under the VAT (Amendment) Act No. 4 of 2025.
A gazette notification highlighted that foreign service providers, ranging from streaming platforms to fintech apps and SaaS companies, must register for VAT if their supply exceeded Rs. 60 million annually or Rs. 15 million over the last three months. Covered services include cloud computing, e-commerce, gaming, digital advertising, content-sharing platforms, and more.
“The April VAT amendment was passed earlier this year, but due to legal and industry concerns, its implementation was postponed to October,” said IRD’s Senior Deputy Commissioner Nihal Wijewardana.
He said the delay followed a Supreme Court challenge brought by Uber. The case ended in a six-month settlement period to allow companies time to understand and adapt to the new regulations.
“Most of these companies operate from abroad and don’t have representatives here, which makes implementation and enforcement more complex,” Mr. Wijewardana noted. As a result, the department is modifying its systems and introducing online registration to accommodate the lack of a local presence.
Unlike standard VAT registrations that require certificates to be physically displayed, this process will be fully digital. “The aim is to create a level playing field. Right now, local businesses are at a disadvantage because they charge VAT while foreign competitors don’t, which hurts price competitiveness,” he said, warning that if left unchecked, Sri Lankan consumers could permanently shift to overseas platforms.
Mr. Wijewardana also emphasised that VAT is a tax on the customer, not the business, and more than 100 countries already impose similar rules. “Following registration, these companies will file their own returns through our e-tax system. It’s self-service, but we will monitor them using documents submitted during registration and data from the Central Bank on foreign currency outflows,” he said.
Economists agreed that expanding VAT to foreign digital service providers was necessary to ensure tax fairness.
“Locally registered service providers are already paying taxes, whereas those domiciled outside Sri Lanka have so far operated outside the tax net,” said Rehana Thowfeek, economist and co-founder/director of Arutha. “In keeping with the principles of neutrality in taxation, this is a positive move, as it helps level the playing field. For example, PickMe is subject to local tax laws, while Uber hasn’t been.”
She noted, however, that the expanded VAT will have cost implications for anyone using digital services as defined in the latest gazette, including IT service exporters, the tourism industry, and even those trading in cryptocurrency. “There’s been demand from some groups, like students, to be exempted from this tax. We’ll have to wait and see if the government accommodates those requests.”
Ms. Thowfeek added that while there’s broader pushback calling for a complete VAT exemption for digital services, she finds that unfair. “A lot of essentials in Sri Lanka, like milk powder, are already subject to VAT. If even those are taxed, it’s hard to justify exemptions for digital services.”
At the same time, she questioned reach and equity: “How many Sri Lankans actually use these services? What income groups do they belong to?” While VAT on digital services is not a novel concept globally, she warned that administering it effectively will be the challenge. “Even other countries struggle with implementation. So it remains to be seen how Sri Lanka will manage that.”
While most experts felt the tax encouraged a level playing field, some held that the percentage imposed could be reduced. “Fifteen per cent might be a more bearable VAT to impose since customers are the ones bearing it,” noted Prof. Rohan Samarajiva, Chairman of LIRNEasia. Prof. Samarajiva noted that while businesses can offset VAT, ordinary consumers and small businesses cannot.
He noted, however, that the underlying principle of the VAT on foreign digital services is fairness, not protectionism. “This is a tax that applies uniformly across the board, and it’s a tough position. I don’t like it, but I don’t see an alternative.”
He noted that foreign providers were not previously taxed, whereas local providers have long been subject to VAT.
While VAT is essential, since it’s one of the government’s main sources of revenue from domestic trade, he said the sharp increase in 2024 was aimed at funding public sector salary hikes. “This is easy money and necessary to keep the government functioning, but 15% should be the maximum,” he said.
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