In a significant shift aimed at bolstering state revenue, the Inland Revenue Department of Sri Lanka has announced that Value Added Tax (VAT) will be extended to cover digital services supplied by foreign providers starting October 1, 2025. This move, aligned with conditions laid out under Sri Lanka’s ongoing International Monetary Fund (IMF) agreement, is part of a broader tax overhaul to stabilize the country’s finances after years of economic volatility.
According to the Department, VAT will apply to services rendered by “non-resident persons through electronic platforms” to users in Sri Lanka. This includes everything from streaming subscriptions and e-learning platforms to software licenses and cloud-based services—provided they are purchased from offshore vendors. The Inland Revenue noted that detailed procedures regarding registration, payment, and compliance will be outlined by the Commissioner-General in the coming months. Key definitions, including what constitutes an “electronic platform” or a “non-resident,” are based on existing provisions within the VAT Act.
The reform comes in the wake of Sri Lanka’s unprecedented economic crisis in 2022, which culminated in a sovereign default. A combination of VAT reductions, monetary easing, and uncontrolled fiscal deficits led to severe foreign exchange shortages. In response, the IMF required Sri Lanka to significantly revamp its tax base. The decision to tax foreign digital services is a reflection of that commitment to fiscal reform and digital-era tax modernization.
In tandem with the digital VAT announcement, the Inland Revenue also issued several other VAT-related policy clarifications and exemptions.
Among them:
- VAT Exemption: The supply of naptha by the Ceylon Petroleum Corporation to the Ceylon Electricity Board will be exempt.
- Mandatory VAT Registration: All individuals or entities engaged in commercial import or export of goods—irrespective of turnover or prior exemption status—will now be required to register under the VAT Act.
- Zero-Rated Supplies: Certain categories of services and goods will be taxed at a 0% VAT rate. These include:
- Meals and transport provided by employers to employees (under specific conditions).
- Reinsurance commissions and foreign currency compensation paid to local insurers.
- Unused postage or revenue stamps issued by the central or provincial government.
- Locally produced liquid milk and yoghurt—provided they contain at least 50% fresh, domestically sourced milk.
This final point reflects the government’s ongoing protectionist stance toward domestic dairy production. Sri Lanka imposes some of the highest import tariffs in the world on foreign dairy products, effectively turning powdered milk and yogurt into luxury items for the average consumer. Critics argue that these measures hurt affordability and consumer choice, though officials claim they are vital for safeguarding rural livelihoods and local industry.
The expansion of VAT to foreign digital services places Sri Lanka in line with several other countries in the region—such as India, Indonesia, and Thailand—that have moved to tax overseas digital providers. However, it also opens up questions about enforcement, transparency, and how local consumers will be impacted, especially in a market where access to global digital services has become an everyday norm.
As Sri Lanka races to meet revenue benchmarks and avoid slipping back into economic instability, this tax on digital services—though seemingly minor—is emblematic of the broader balancing act the government must perform: stabilizing the economy without alienating citizens or stifling recovery.
