Dulanga Cumaranatunga
FortuneX, Colombo
dulanga@fortunexlaw.com

Introduction

Sri Lanka has joined the growing list of jurisdictions that impose indirect taxes on the cross-border supply of services provided through electronic platforms. This was a key reform in the 2025 Budget proposal for Sri Lanka, shaped in part by ongoing discussions with the International Monetary Fund (IMF) during the reviews of Sri Lanka’s progress made in regard to the Extended Fund Facility (EFF). Legislation has now been enacted to give effect to this reform. The reform broadens the value-added tax (VAT) base to include non-resident persons providing services through electronic platforms, even in the absence of the service provider having a fixed place of business in Sri Lanka.

Enabling legislation

The Value Added Tax (Amendment) Act, No 4 of 2025, introduced key provisions for the imposition of VAT on the supply of services provided through electronic platforms. Accordingly, the ‘supply of services by a non-resident person through an electronic platform to a person in Sri Lanka’ is subject to VAT.  

Key definitions

The following are key definitions in the VAT Amendment Act:

• electronic platform ‘means any procedure in the form of a website or mobile application used by one or more service providers to provide their services to the service recipients’;

• non-resident person ‘means any person who occasionally undertakes transactions involving supply of services, whether as principal or agent or in any other capacity, but who has no fixed place of business in Sri Lanka, and does not include a person registered under section 10, 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’; and

• fixed place of business ‘means a place which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs’.

Scope of application

Sri Lanka has adopted the destination principle, which permits the imposition of indirect tax on non-resident suppliers of services in the country of consumption. While the legislative intent is to impose VAT on non-resident persons supplying services to consumers in Sri Lanka via electronic platforms, ambiguity remains regarding the modalities of implementation.

Non-resident suppliers use diverse business models for the cross-border supply of services. Therefore, services may be provided via a platform directly owned by the non-resident or held within a corporate structure. Alternatively, the non-resident supplier may provide services as a third-party seller via a platform that acts as an online marketplace. In the latter scenario, the online marketplace would serve as the intermediary between the underlying supplier and the end consumer.

Jurisdictions such as Australia, the European Union and New Zealand assign VAT liability to the digital platform through which online sales are carried out. Accordingly, the platform bears the VAT liability either as the ‘direct service provider’ or as a ‘deemed supplier’ where it operates as a marketplace for the participating suppliers.

Therefore, further clarity is required on the parameters for the imposition of VAT, specifically in regard to defining the taxation point and the party responsible for collecting and remitting the VAT to the Department of Inland Revenue in respect of services provided to consumers in Sri Lanka.

Effective date

The legislation imposing VAT on the supply of services by non-resident persons through electronic platforms will take effect from 1 October 2025.

VAT rate

The applicable VAT rate in Sri Lanka will be 18 per cent, aligning closely with rates imposed by countries such as India. Globally, this rate sits at the higher end of the spectrum, with countries such as the United Kingdom applying a 20 per cent rate, while others such as Thailand and the United Arab Emirates impose rates of seven per cent and five per cent, respectively.

Registration threshold

The value of the taxable supply of good or services (other than financial services) must exceed LKR 15m per quarter or LKR 60m over a 12-month period to meet the standard threshold for VAT registration in Sri Lanka.

Compliance obligations

Under the VAT Amendment Act, any non-resident person providing services in Sri Lanka via an electronic platform is required to pay the applicable tax for the relevant taxable period in such manner as may be prescribed by the Commissioner General of the Inland Revenue Department. Furthermore, the statute provides that where such tax is not paid, the person liable to pay it will be deemed to be in default and in circumstances where the tax relates to more than one person, each person will be deemed to be in default for purposes of the Act.

The procedure for registration, charging, collection and filing of the applicable tax returns has not yet been specified by the Commissioner General of the Inland Revenue Department.

Considerations for implementation and enforcement

Sri Lanka’s move to impose VAT on services provided by non-residents through electronic platforms aligns with global efforts to modernise tax regimes to keep pace with the rapid growth of the digital economy. However, reference to mechanisms and guidelines used in other jurisdictions, such as the Organisation for Economic Co-operation and Development’s (OECD) guidelines on The Role of Digital Platforms in the Collection of VAT/GST on Online Sales^[1] would aid the effective implementation and enforcement of the new rules in Sri Lanka.

Some key considerations in this regard are as follows:

• defining the taxation point. The point of time for VAT imposition needs to be clearly defined. Specifically, whether VAT is imposed at the time of actual supply, the performance or delivery of the goods or services or the time of the receipt of payment by the supplier. A practical solution recommended by the OECD is defining the taxation point as the point of confirmation of payment for the supply of goods or services through electronic platforms;

• identifying the party responsible for collecting and remitting VAT is crucial where non-residents provide services through electronic platforms that operate as marketplace models. In many jurisdictions, the platform itself is treated as the ‘deemed supplier’ for VAT purposes in relation to services provided by third-party suppliers using such platforms. Consequently, the platform may be held either directly responsible for VAT compliance, or jointly and severally liable for ensuring that suppliers using their platform comply with VAT regulations. Alternatively, some jurisdictions adopt the reverse charge mechanism, where the tax obligation shifts to the recipient of the service. However, the reverse charge method is more suitable for business-to-business (B2B) transactions than for business-to-consumer (B2C) transactions;

• comprehensive guidance on how the system will be implemented is essential. The Department of Inland Revenue must issue guidelines, clearly setting out the procedure and timelines for registration, the collection and remittance of VAT and the filing of tax returns;

• promote compliance by limiting obligations to what is strictly necessary to ensure effective compliance. As tax return filing requirements vary widely across jurisdictions, the tax authorities could consider accepting less detailed tax returns from non-residents vis-à-vis those required from local businesses that are entitled and able to claim input credits;

• ensuring there is adequate lead time in regard to the requirements. This is necessary for non-resident suppliers to seek professional advice in regard to integrating Sri Lankan VAT compliance into their existing systems, which are often already dealing with complex and overlapping obligations across multiple jurisdictions; and

• the challenges need to be acknowledged. Officials at the Department of Inland Revenue need to be aware of the challenges in regard to implementation and the relevant international best practices in order to facilitate tax compliance and ensure effective enforcement.

Closing remarks

As of the date of writing this article, Sri Lanka is three months away from the effective date of the imposition of VAT on the cross-border supply of services through electronic platforms. However, significant efforts are necessary to ensure the effective implementation and enforcement of the new rules, beginning with the issuance of comprehensive guidance on the process of registration, payment, collection and filing of tax returns by non-resident suppliers. Further, non-resident suppliers will need adequate lead time to integrate the new obligations into their systems. The Department of Inland Revenue has indicated that there may be further amendments to the VAT Amendment Act concerning the taxation of the cross-border supply of services provided through electronic platforms.