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Sri Lanka
Sri Lanka
Asia-Pacific

Sri Lanka Introduces 18% VAT on Foreign Digital Service Providers in 2025

March 9, 2025
Sri Lanka Introduces 18% VAT on Foreign Digital Service Providers in 2025

On February 17, the Sri Lankan Ministry of Finance publicly presented the 2025 Budget Speech, which includes information on the most crucial tax measures, such as imposing VAT on digital services providers, mandating the use of point-of-sale (POS) devices by VAT-registered persons, and abolishing the simplified VAT system and replacing it with a risk-based refund system.

Impact on Taxable Persons

As stated in the 2025 Budget Speech, proposed tax measures include introducing an 18% VAT on foreign digital services providers. The decision to introduce the VAT on digital services was based on the International Monetary Fund (IMF) report from June 2024. Once the rules are in place, foreign digital services providers will have to register for VAT and report, collect, and remit VAT when providing services to consumers in Sri Lanka.

The timeline for implementing VAT on foreign digital service providers has yet to be defined. The Sri Lankan government is expected to continue working on the regulatory framework in the following months.

As part of its broader digitalization agenda, Sri Lanka continues to develop into a cashless economy. The government plans to mandate using POS devices for VAT-registered businesses as the key mechanism to prevent tax evasion and increase fiscal efficiency.

Conclusion

The defined measures are only part of the overall changes to the tax regime, which include increasing capital gains tax to 15% for individuals and 30% for businesses, raising stamp duty on leases to 2%, and raising the gross collection levy on betting and gambling to 18%.

Regarding the changes to the VAT regime, Sri Lanka wants to digitalize and modernize the system and level the playing field for domestic providers subject to VAT from January 1, 2024. As results show in some other countries, the decision to impose VAT on foreign digital service providers also means more budget revenues, which could further contribute to the economic growth.

Source: Bloomberg, KPMG, Budget Speech 2025

What is the new VAT rate for foreign digital service providers in Sri Lanka?
The Sri Lankan government plans to impose an 18% VAT on foreign digital service providers as part of its 2025 tax reforms.
Why is Sri Lanka introducing VAT on foreign digital services?
The decision is based on the IMF’s recommendations to increase tax revenue and create a level playing field for domestic and foreign digital service providers.
When will the VAT on foreign digital service providers take effect?
The exact implementation timeline has not been announced, but the Sri Lankan government is expected to finalize the regulatory framework in the coming months.
Who will be required to register for VAT under the new rules?
Foreign digital service providers offering services to consumers in Sri Lanka will need to register, report, collect, and remit VAT under the new regulations.
How does this VAT change fit into Sri Lanka’s broader tax reforms?
Other measures include mandating POS devices for VAT-registered businesses, increasing capital gains tax, raising stamp duty on leases, and adjusting gambling levies.
What impact could this VAT introduction have on Sri Lanka’s economy?
The tax reform is expected to increase government revenue, enhance tax compliance, and support Sri Lanka’s digitalization efforts in building a cashless economy.
Sri Lanka
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VAT tax researcher, specializing in delivering clear, up-to-date insights on indirect tax regulations and compliance for our website. Rasmus Laan

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