A brief analysis of the saliant features of the Value Added Tax (Amendment) Bill 2026, imposing amendments to the VAT Act No. 14 of 2002, as amended (VAT Act).
1. DIGITAL SERVICES TAX (Effective July 1, 2026)
Applies to non-resident persons supplying services through electronic platforms to recipients in Sri Lanka.
Electronic Platform –
The Bill defines an electronic platform as ‘any online system, website, mobile application, or other digital interface operating through the internet that enables one or more service providers to supply services to service recipients.’
Non-Resident Person –
A non-resident person means ‘any person who occasionally or otherwise undertakes transactions involving supply of services, whether as principal or agent, but who has no fixed place of business in Sri Lanka, and does not include a person registered under Section 10 of the VAT Act, where such person carries on or carries out a taxable activity in Sri Lanka without a fixed place of business but having an agent to act on behalf of such person as referred to in Section 55.
Who Must Register?
Non-resident digital service providers must register for VAT if, on or after July 1, 2026:
- The total value of digital services in the ‘preceding 12 months exceeds LKR 36 million’ (or equivalent in foreign currency); or
- The total value for ‘any quarter (commencing after July 1, 2026) exceeds or is likely to exceed LKR 9 million’ (or equivalent).
Registration must be made electronically within 3 months from the date on which the obligation to register arises or from the date on which the Commissioner-General of Inland Revenue (CGIR) specifies the registration form whichever is later.
Who is a Sri Lanka Recipient?
A recipient will be deemed to be in Sri Lanka where two or more of the following conditions are met:
(a) Billing, residential or business address is in Sri Lanka
(b) Payment for digital service is made through a Sri Lankan bank or financial institution
(c) Payment instrument used for the transaction is issued in Sri Lanka
(d) IP address of the device used by the recipient is located in Sri Lanka
Is there an applicable exclusion from VAT in certain instances?
Where the Sri Lankan recipient is a VAT-registered person, the non-resident digital service provider is not required to charge or collect VAT. This B2B carve-out is subject to appropriate documentation being maintained. The non-resident provider must instead furnish a simplified statement to the IRD, , containing specified particulars of supplies made to registered persons within the prescribed period and in the prescribed manner. Information related to such supplies would include (a) the date of payment or the invoice date; (b) the taxpayer identification number of the recipient; (c) the name of the recipient; (d) the value of the supply; (e) invoice number; and (f) description of the service supplied.
Failure to submit the required simplified statement may attract a penalty of up to LKR 50,000.
Where VAT has already been charged and cannot be refunded to the Sri Lankan recipient (as it has been remitted to the IRD), the VAT paid shall be treated as input tax in the hands of the registered recipient, deductible to the extent allowable under Section 22. A valid invoice from the non-resident service provider separately specifying the VAT charged shall constitute a valid tax invoice for this purpose.
Payment Flexibility –
Tax may be remitted in Sri Lankan Rupees or approved foreign currency to a designated bank account, either directly or through an appointed representative. Further, it can be made by electronic remittance through the online system of the IRD or through such other electronic payment facility, as approved by the CGIR.
Currency Conversion Variances –
Any variation arising from the conversion of foreign currencies to Sri Lankan Rupees* shall be disregarded for return purposes and shall not be treated as tax in default or a refund.
Cancellation of Registration –
The CGIR shall cancel the registration of a non-resident digital service provider where:
(a) The registered person is found not to be eligible to register;
(b) Supplying of services has ceased for more than six months, or
(c) Total value of digital services has not exceeded the registration threshold for two consecutive taxable periods.
Further, If a registered non-resident digital service provider:
- Ceases to provide digital services, or
- Has a total value of digital services below the threshold for two consecutive tax periods,
- then such provider may request the CGIR to cancel its registration, within 30 days of cessation or from the end of those two tax periods.
2. EXEMPTED DIGITAL SERVICES
The following digital services supplied through an electronic platform by a non-resident person are exempted :
Educational services —
Online courses, seminars, training, digital education platforms, virtual classrooms, learning management systems and courses in marketplaces in relation to educational courses.
‘Marketplace in relation to educational courses’, is defined as an educational or training program offered on a digital platform that serves as a centralized hub connecting multiple independent instructors or educational institutions with learners
Healthcare services —
Online consultations, digital prescriptions, AI-assisted diagnostics, digital health tracking and telemedicine.
Services to diplomatic missions —
To the extent specified under relevant written laws or in accordance with any written agreement entered into with or on behalf of the Government of Sri Lanka.
3. REDUCED VAT REGISTRATION THRESHOLD (Effective July 1, 2026) –
From July 1, 2026, a person carrying on a taxable activity must register for VAT if:
(a) At the end of any taxable period, the taxable supplies of goods or services made in Sri Lanka in that taxable period have exceeded LKR. 9 million; OR
(b) in any 12-month period, taxable supplies exceed LKR 36 million; OR
(c) at any time, there are reasonable grounds to believe either of the said threshold is likely to be exceeded in a succeeding taxable period or 12 months.
Businesses currently below the existing threshold should urgently assess whether they will be caught by the new, lower threshold from July 1, 2026.
4. CHANGES TO VAT ON FINANCIAL SERVICES — RATE INCREASE (Effective July 1, 2026)
Increase Rate –
The VAT rate on financial services will increase from 18% to 20.5%.
This applies to taxable periods commencing on or after July 1, 2026.
5. GARMENT BUYING OFFICES — NEW ZERO-RATING (Effective October 1, 2025)
Services provided to overseas buyers by a garment buying office registered under the Industrial Promotion Act, No. 46 of 1990, are zero-rated with effect from October 1, 2025, so far as such services are provided to a person outside Sri Lanka for payment in foreign currency.
6. SIMPLIFIED VALUE ADDED SCHEME REPEALED
The Bill introduces consequential amendments to Sections 7 and 58 of the VAT Act arising from the repeal of the Simplified Value Added Scheme.
7. RESTRICTIONS ON INPUT TAX
- Re-exported Machinery & Equipment –
Input tax credit will be disallowed on plants, machinery, equipment or vehicles where the payment of taxes on such assets imported for use in projects under the provisions of the Act has been deferred and such assets have not been re-exported within one month of the completion of the project.
- Deemed Input Tax for New Wholesale/Retail Registrants –
Persons engaged in wholesale or retail trade, registering on or after April 1, 2026, may claim a deemed input tax on certain prescribed unsold stocks of goods held as at the date of registration, excluding exempt items. The deemed input tax is calculated at the VAT rate in force at the time of acquisition of such goods. Such person is required to maintain records of unsold stocks in a form prescribed by the CGIR and submit such records together with the relevant VAT return.
8. BUSINESSES OF STRATEGIC IMPORTANCE ESTABLISHED IN THE PORT CITY – VAT EXEMPTION
Supplies of goods or services to any business identified and approved as a ‘Business of Strategic Importance’ under Section 52 of the Colombo Port City Economic Commission Act, No. 11 of 2021 and regulations made thereunder are exempted from VAT.
9. MANDATORY USAGE OF SECURED POINT OF SALE MACHINES
All registered persons will be required to use secured Point of Sale (POS) machines l for all transactions, invoice issuance and record-keeping, within three months of the prescribed date.
What is a Secured Point of Sale Machine?
A secured point of sale machine is defined as an electronic device or system, approved by the CGIR in the manner prescribed, used to record supplies of goods or services, generate invoices or receipts, and capture transaction data in real time to ensure proper accounting of turnover and the collection and remittance of VAT.
10. ENHANCED PENALTIES & CRIMINAL PROCEEDINGS
The VAT Amendment Bill 2026 significantly enhances penalties and criminal proceedings as follows:
Penalties under Sections 66 – Fraud and 67:
| Period | Maximum Fine | Imprisonment |
| Prior to 1 October 2025 | LKR 25,000 | Up to 6 months |
| On or after 1 October 2025 | LKR 1 Million | Up to 6 months |
Section 66 (as amended) — Tax Evasion and Fraudulent Refund Claims: It is an offence to attempt to evade tax, or to willfully and fraudulently claim or attempt to claim a refund, or to assist any other person to willfully and fraudulently claim or attempt to claim a refund, to which that person is not entitled.
What are the New Offences in the Bill?
Section 67 —
- Obtaining or attempting to obtain a refund by fraud, misrepresentation, or the provision of false or misleading information or documents, or by the concealment of any material fact; or
- Failure to furnish valid tax invoices, customs goods declarations or other authenticated documents as required under Section 21.
Multiple Convictions –
Where a person is convicted of more than one offence arising from a single act, omission or course of conduct, the maximum total term of imprisonment shall not exceed five years.
Criminal Proceedings –
The IRD may investigate any offence under the VAT Act. The Attorney-General may, in the name of the Commissioner-General, institute criminal proceedings.
Limitation Periods –
Proceedings under the VAT Act may commence
- With regards to acts – 12 years from the doing of the act.
- With regard to failures – 12 years from when act was required, or 3 years from the IRD’s first awareness, whichever is earlier.
- With regard to non-disclosure/misrepresentation related to person’s tax liability – 3 years from final determination of correct tax liability.
