Sri Lanka VAT on Digital Services

Background

The Sri Lankan Government has been trying for some time now to implement a VAT regime for non-resident providers of digital services. Looking from a regulatory perspective, the last two years have been very challenging concerning the introduction of the regime. 

Since the adoption of the Finance Act 2025, the introduction of the new VAT regime was one of the “priorities” of the Government. However, as the current situation unquestionably shows, some legislative pieces were always missing. 

On June 30, 2026, the Parliament of Sri Lanka adopted Value Added Tax(Amendment) Act No. 14 of 2026, which introduced important changes to the Value Added Tax Act. No 14 of 2002(VAT Act). 

The adoption of this Amendment Act validates the existence and applicability of the VAT regime on digital services. This Amendment Act certifies the introduction of the regime, starting date, registration obligation, chargeability rules, collection, and remittance of the tax payable. 

The Amendment Act also modifies the penalty and fines framework for taxable persons that should comply with the VAT Act, and these new provisions also extend to non-resident providers of digital services. 

Sri Lanka VAT on Digital Services

New Framework 

The Amendment Act, which was published in the Official Gazette on July 3, 2026, formalized the introduction of the new VAT regime. Under the new regime, non-resident digital service providers(NRDSPs) should register for VAT using the specifically designated template, which should be submitted online to responsible tax authorities. 

Timeline 

Non-resident providers of digital services should comply with the VAT regime on digital services from July 1, 2026. 

VAT Compliance for Non-Resident Digital Service Providers 

Starting from July 1, 2026, VAT will apply to services provided by NRDSPs to customers residing in Sri Lanka. 

Non-resident providers of digital services that have customers in Sri Lanka are required to register for VAT under Section 25L(subsection 1) of the principal VAT Act as amended. 

Registration

The latest amendments to the principal VAT Act introduced new registration requirements for non-resident providers of digital services. A non-resident digital service provider should register for VAT when the value of taxable digital services: 

• Is above LKR 60 million(or its equivalent in foreign currency) during any consecutive 12-month period ending on or after July 1, 2026; or 
• Exceeds or is likely to exceed LKR 15 million(or its equivalent in foreign currency) in any quarter beginning on or after July 1, 2026 

Any person who is required to be registered under the terms indicated above shall make an online application(in a prescribed format) not later than three months from the date on which it is required to be registered or from the date on which the Tax Authority has made technically available simplified registration, whichever comes later. 

Representative

Non-resident providers of digital services may elect to register directly or through a delegated representative following the simplified registration procedure.

Place of Supply Rules 

Sri Lanka VAT framework for determining the place of supply rules for digital services is developed in alignment with best practices established specifically for the digital economy. If the local customer acquires the digital service from a foreign supplier(without PE or any sort of physical nexus in the country), and there are at least two conditions met from the list below, the place of supply for digital services is in Sri Lanka: 

1. billing, residential or business address of the recipient is in Sri Lanka;
2. payment for such digital services is made through a bank or financial institution in Sri Lanka;
3. payment instrument used for the transaction is issued in Sri Lanka; or
4. internet protocol address of the device used by the recipient is located in Sri Lanka 

When two or more conditions are met, the non-resident provider of digital service shall treat the transaction as taxable.

B2C Remote Services

Non-resident digital service providers that provide services to local consumers should charge, collect, and remit VAT at the rate of 18 % on each B2C supply. 

B2B Remote Services

Non-resident digital service providers aren’t accountable for charging and collecting VAT on B2B transactions.

Scope of digital services 

The Finance Act 2025 and Guidelines issued by the Sri Lanka Revenue Authority define the scope of electronic services as follows: 

• Online advertising 
• Streaming 
• Software and applications 
• Marketplaces and e-commerce
• Cloud and hosting
• Online gaming and betting
• Paid social networks and premium features, Business tools
•  VPNs, antivirus and security tools 

Digital Marketplace

The e-commerce marketplaces are in scope of the simplified VAT regime. 

VAT Declaration and Remittance 

Non-resident electronic services providers should file the return using the online system developed by the Inland Revenue Department. 

The return should be submitted by the last day of the month following the taxable reporting period. The tax payable should be remitted within the same deadline. 

The remittance should be processed online following the technical guidelines issued by the Inland Revenue Department. The payment should be made in Sri Lankan rupees or in such foreign currency as may be previously permitted by the tax authority. The payment should be remitted to a specifically indicated account. 

Payment could be processed directly by the respective taxable person or through its representative. 

Invoicing 

No specific invoicing rules. The non-resident digital service providers should take into account that the accounting records should be organized on an invoice-by-invoice basis. 

Penalties

Non-resident digital service providers could face various fines and penalties for late registration, late filing, and late payment. Failure to comply with the VAT regime for NRDSPs could result in:

• Late registration penalties – The Tax Authority could process a penalty of a sum not exceeding fifty thousand rupees, and give notice in writing or by electronic means to such person of the imposition of such penalty; give notice in writing or by electronic means to such person to pay such penalty; and to register for VAT
• Late filing penalties as prescribed by the General Tax Code 
• Late payment interest calculated at the statutory rate
• Additional penalties for inaccurate declarations or underestimation of VAT – a fine not exceeding LKR 1 million 
• Criminal proceedings in the event of deliberate fraud or evasion

How to Stay Compliant 

Sri Lanka, after more than a few postponements within the last two years, put in effect a VAT regime for non-resident digital service providers. 

We have continuously followed the legislative updates concerning the introduction of the VAT regime for overseas providers of digital services. 

The advisory role offered by 1stopVAT for these providers extends from understanding the threshold exposure for registration, accountability for VAT, assistance with return preparation, and remittance of the owed tax.

Where we cannot manage your VAT requirements directly, we have a great network of local tax agents who will take care of this. 

In addition to successfully managing your registration, we can offer additional services for digital service providers in Sri Lanka, such as: 

• Assistance with Tax Reporting
• Tax Advisory and Ongoing Tax Management
• Correspondence with Tax Authorities

Takeaway

Frequently Asked Questions