Sri Lanka Delays VAT on Digital Services to 2026

Following last year's announcement that it would introduce VAT on digital services, in February of this year, the Sri Lankan Ministry of Finance publicly presented the 2025 Budget Speech, which, among many other items, included information on implementing the announced measure in practice. The measure was initially scheduled to take effect on October 1, 2025. However, due to pressure and expressed concerns from key stakeholders, the government decided to postpone the implementation.

New Implementation Timeline

In September, the Sri Lankan government announced that, due to requests from service providers and in accordance with the outcome of discussions with the International Monetary Fund (IMF), it had decided to extend the implementation timeline. Therefore, the government amended the VAT Law and set a new effective date for April 1, 2026.

The main concerns expressed by both the affected non-resident digital service providers and the IMF relate to specific practical compliance issues that the Sri Lankan government plans to address before imposing VAT on digital services provided by foreign companies. 

Besides the government and its competent bodies having additional time to resolve some implementation and compliance matters, non-resident suppliers and digital service providers also have a further six months to prepare their business, accounting, and other operations and systems to meet the defined requirements. Notably, Sri Lankan consumers may face more expensive digital services if companies transfer this burden onto them, rather than absorbing costs themselves.

Conclusion

Once the rules are in place, foreign digital service providers must register for VAT, collect and remit it, and apply a standard 18% VAT rate to the fees for digital services provided to local consumers. However, if the government does not address and resolve the compliance issues, implementation may be postponed once again. Therefore, digital services companies, such as those offering streaming music and video, apps, online gaming, automated e-learning, search engines, or SaaS services in Sri Lanka, should continue to monitor further developments.

Source: Sri Lanka Cabinet Office, VATabout