The New Year has brought many significant changes regarding indirect taxation in the country. The Government decided to introduce this package of changes in the first month of 2024, as it sees in this move a powerful force in growing public revenue and establishing a more competitive business environment.
The VAT threshold is decreased from Rs 80 million to Rs 60 million.
Starting January 1, 2024, resident businesses providing electronically supplied services to non-taxable persons residing in the country should levy VAT on their supplies.
The Standard VAT Rate is increased from 15% to 18%.
Timeline
The amendment of the VAT Law came into force on January 1, 2024.
Impact and Challenges
For a few years, suppliers of digital services and digital products have enjoyed being VAT exempted from their turnover in the country. This year, this has changed. The move from the advantageous regime into one where the newly imposed Standard VAT rate of 18% needed to be levied wasn’t received as happy news.
Based on the interpretation of the VAT Law, the obligation to impose a VAT on providing digital services to end customers in Sri Lanka captures only providers(digital platforms, online merchants) whose place of tax residence and/or permanent establishment is in the country.
Foreign providers are isolated from this change at the present moment; they don’t have VAT liability, and they can provide similar/same services without charging VAT. Looking upon the VAT Law, its related practical interpretation, and the strong voice of the media and competing local businesses, the non-resident businesses(without a physical presence in the country) are far out of scope.
However, this move has caused a powerful reaction from the domestic businesses competing with the strongholds of the global digital economy. The VAT Law could be amended in the upcoming period so that the tax liability for this type of service and sales of digital goods will also cover non-resident businesses.
The country decided to make significant changes within the VAT landscape. The introduction of tax liability for the provision of electronically supplied services for local businesses, the increase of the VAT rate, and the decrease of the VAT threshold are necessary measures to boost public revenue. At the same time, the missing out on putting the tax liability on foreign providers of digital services that operate in the country caused not-so-positive reactions from the domestic business sector.
Foreign providers of digital services could expect that in the following months, there will be discussions about the imposition of tax liability for providing digital services to customers based in the country.
Aleksandar Delic
1stopVAT Senior Indirect Tax Researcher (Global Content)