VAT rate on financial services is set to rise to 20.5% from July 1, 2026, with new registration thresholds and digital tax rules.
The VAT rate applicable to financial services is set to increase from 18% to 20.5% under new amendments published in the Government Gazette.
The bill to amend the Value Added Tax Act No. 14 of 2002 has been published as directed by the Minister of Finance, Planning and Economic Development. The proposed amendment is scheduled to come into effect from July 1, 2026.
The move is expected to draw close attention from businesses, banks, finance companies, digital service providers, and taxpayers, as the changes go beyond the headline tax increase and introduce wider adjustments to VAT registration, digital services, tax collection, refunds, and the phasing out of the SVAT scheme.
Under the new amendments, the VAT rate on financial services will rise from 18% to 20.5%. This raises concerns about the cost impact on financial sector operations and whether the change could eventually be felt by customers through service charges, fees, or other indirect costs.
The annual turnover thresholds for mandatory VAT registration have also been revised, with the new thresholds taking effect from July 1, 2026.
Accordingly, businesses with a taxable period turnover exceeding Rs. 9 million or an annual total turnover exceeding Rs. 36 million will be required to register for VAT.
This means more businesses may have to assess their turnover carefully to determine whether they fall within the mandatory VAT registration requirement under the amended law.
Taking into account modern technological trends, the provisions for charging VAT on services provided through electronic platforms have also been extended until July 1, 2026.
A new chapter has been added to the Act for the registration and tax payment of digital services. This signals a stronger focus on digital economy taxation as more services are delivered through electronic platforms.
New provisions have also been introduced regarding the use of point of sale machines. These measures are aimed at streamlining tax collection and improving accounting practices.
However, questions remain over how quickly businesses will adapt to these compliance requirements, particularly smaller operators that may face additional administrative pressure.
The amendments also provide an opportunity to deduct the entertainment tax levied by local government bodies when calculating VAT.
This could be relevant for businesses and sectors affected by both VAT and local authority entertainment tax obligations.
Penal provisions and criminal proceedings have also been tightened for those attempting to obtain tax refunds by submitting false information.
This raises the stakes for taxpayers and businesses seeking refunds, as the government appears to be placing stronger emphasis on preventing fraud and improving tax discipline.
The bill also includes consequential amendments required to abolish the previously implemented Simplified Value Added Tax scheme.
What happens next could be critical for businesses across Sri Lanka, as the VAT rate increase, new registration thresholds, digital service rules, point of sale requirements, tougher refund penalties, and SVAT abolition could reshape tax compliance from July 1, 2026.
