On June 30, 2026, the Sri Lankan government certified amendments to the VAT Law, introducing several VAT changes. Following the certification, VAT amendments were published in the Official Gazette on July 3, 2026. Some of the key amendments concern the VAT registration threshold and the introduction of mandatory VAT registration for non-resident digital service providers.

Key VAT Changes Enacted

First, the VAT registration threshold for businesses remains at an annual turnover of LKR 60 million (approximately USD 183,000). The government decided not to adopt the previous proposal to reduce the threshold to LKR 36 million, which was one of the key indirect tax reform measures in Sri Lanka's 2026 Budget. 

Rather, the amendments increase the VAT rate applicable to financial services from the previous level to 20.5%, with the new rate applying from July 1, 2026. This change raises the tax burden on financial sector services and is expected to affect banks, financial institutions, and other providers of taxable financial services.

Another significant change restricts input tax recovery in certain import situations. Businesses that import plant, machinery, equipment, or vehicles for project purposes and receive a deferral of VAT payment will no longer be able to claim the related input tax if those assets are not re-exported within one month after the completion of the project.

A further change introduces zero-rating for certain services provided by garment buying offices registered under the Industrial Promotion Act. Under this measure, which applies retroactively from October 1, 2025, services supplied to customers located outside Sri Lanka qualify for zero-rating if payment is received in foreign currency.

After previously postponing mandatory VAT registration for non-resident digital service providers, Sri Lanka has now introduced the requirement. Foreign businesses supplying digital services to Sri Lankan customers must follow new registration, reporting, and payment obligations. Sri Lankan VAT on digital services rules came into effect on July 1, 2026, and businesses must register for VAT once their supplies exceed LKR 60 million (approximately USD 183,000) annually or LKR 15 million (approximately USD 45,700) quarterly.

Conclusion 

All taxable persons should carefully review new VAT rules and regulations, especially since the Sri Lankan government also made significant changes to penal and criminal provisions relating to tax fraud and evasion and other VAT offences. Therefore, businesses operating in affected sectors, particularly financial services and digital service providers, should promptly assess their VAT compliance obligations