Sri Lanka: Value Added Tax (Amendment) Act No. 14 of 2026 introduces VAT on nonresident digital service providers

The Value Added Tax (Amendment) Act No. 14 of 2026—which was certified by the Speaker on June 30, 2026, and published in the gazette on July 3, 2026—includes the following VAT-related measures:

• Mainstream VAT registration threshold of LKR 60 Mn per year maintained, foregoing the proposal to reduce the threshold to LKR 36 Mn per year
• VAT on financial services rate increased to 20.5%—effective July 1, 2026
• Disallowance of input tax when payment of tax has been deferred on plant, machinery, equipment, or vehicles imported for project use and not re-exported within one month of project completion
• Zero-rating for services to overseas buyers by a garment buying office registered under the Industrial Promotion Act, if services supplied to a person outside Sri Lanka and payment in foreign currency—effective October 1, 2025
• VAT on nonresident digital service providers
  • Mandatory registration: Nonresident digital service providers must register for VAT if their supplies to Sri Lankan customers exceed LKR 60Mn in 12 months or LKR 15Mn in a quarter.
  • Electronic registration: Registration applications must be submitted electronically, within three months, from the date liability arises or the form is issued, whichever is later.
  • Determining a Sri Lankan customer: A recipient is deemed to be in Sri Lanka when at least two indicators are met, such as a Sri Lankan billing address, payment through a Sri Lankan bank, a local payment instrument, or a Sri Lankan IP address.
  • Cancellation of registration: Registration may be cancelled if the provider ceases supplying services, is no longer eligible, or falls below the registration threshold for two consecutive taxable periods.
  • B2B carve-out: Digital services supplied to VAT-registered persons in Sri Lanka are not subject to VAT.
  • Payment of VAT: VAT must be paid electronically, either in Sri Lankan Rupees or an approved foreign currency, directly by the provider or through an appointed representative.
  • Returns and record keeping: Registered nonresident providers must file electronic VAT returns, maintain invoice-based accounts, and communicate with the tax authority.
  • Exemptions: Exemptions are provided for educational services, healthcare, and supplies to organizations or diplomatic missions
• VAT exemption for supplies of goods or services to businesses designated as businesses of strategic importance (BSI) (approved in the national interest or for economic advancement), as per the Colombo Port City Economic Commission Act and related regulations

Read a July 2026 report prepared by the KPMG member firm in Sri Lanka