Digital Services Provided by Non-Residents to Sri Lankans via Electronic Platforms to be Taxed at 18% VAT from 01st October 2025
In a significant move towards aligning Sri Lanka's VAT regime with global practices, the Government of Sri Lanka has introduced a Digital Services VAT on non-resident service providers. As per the Gazette Notification No. 2443/30 issued on 01st July 2025, the supply of digital services by non-resident persons through electronic platforms to persons in Sri Lanka will be liable for 18% VAT with effect from 01st October 2025.
Scope of the Taxable Services
The regulation outlines that the following types of services supplied through an Electronic Platform are considered taxable, though not limited to the list below:
Cloud Computing – Hosting, storage, and computing power services
Software as a Service (SaaS) – Web-based applications
E-commerce Services – Online stores, payment gateways, and order fulfillment
Digital Marketing & Advertising – SEO, social media marketing, PPC ads, email marketing
Cybersecurity Services – Threat detection, firewall protection, data encryption
IT Support & Managed Services – Remote tech support, IT consulting, helpdesk solutions
Streaming Services – Video, music, live content platforms
Use of Apps for Hotel Reservations, Ticket Booking
Note: Even if a service is not listed above, it may still be subject to VAT if it falls within the scope defined in Section 1.1 of the Gazette.
Who is a Non-Resident under the VAT Act No. 04 of 2025?
As per the Value Added Tax (Amendment) Act No. 04 of 2025, a “non-resident person” is defined as:
"Any person who occasionally undertakes transactions involving supply of services, whether as principal, agent, or in any other capacity, but who has no fixed place of business in Sri Lanka. This does not include a person registered under Section 10 who carries out a taxable activity in Sri Lanka through an agent as referred to in Section 55."
In other words, if a foreign entity does not have a physical or legally registered business presence in Sri Lanka but provides digital services to Sri Lankan users, they fall under this definition.
What is an “Electronic Platform”?
"Any procedure in the form of a website or mobile application used by one or more service providers to provide their services to service recipients."
This includes digital platforms such as websites, SaaS applications, and mobile apps used to connect service providers with users in Sri Lanka.
What is a “Fixed Place”?
"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."
This excludes foreign suppliers who do not maintain a local presence in Sri Lanka.
Why Was This VAT Introduced?
To create a level playing field: Local digital service providers are already VAT-registered. This change ensures foreign providers don’t receive an unfair tax advantage.
To increase tax fairness and revenue: With the growth of cross-border digital services, Sri Lanka aims to capture VAT revenue on such usage.
To align with global practices already adopted in countries like India, Australia, and the EU.
How Does This Apply in Practice?
VAT is applicable only when the service is received by a person in Sri Lanka from a non-resident supplier via an electronic platform.
Example 1 – AliExpress or Temu purchases (Not VAT-liable): When a Sri Lankan customer purchases a product via platforms like Temu or AliExpress, it may appear as though a foreign digital service is used. However, in this case:
The seller is typically a non-Sri Lankan entity (e.g., a Malaysian or Chinese supplier).
The platform’s service (Temu or AliExpress) is provided to that foreign seller, not directly to the Sri Lankan customer.
Therefore, the digital service is not consumed in Sri Lanka, and the platform is not providing a service to a Sri Lankan person.
Hence, such transactions fall outside the scope of this Digital Services VAT.
Example 2 – Spotify, Facebook Ads, Booking.com (VAT-liable): These services are directly consumed by users in Sri Lanka and provided by non-resident companies via electronic platforms. In this case, 18% VAT will be applicable.
Will Users Try to Bypass Using VPNs?
There are growing concerns that some users may attempt to bypass this VAT by using Virtual Private Networks (VPNs) to hide their actual location and appear as though they are outside Sri Lanka. While this is technically possible, there is no guarantee it will work in the long run.
Although we cannot confirm the exact measures yet, it is expected that the Inland Revenue Department (IRD) will take necessary actions to minimize such avoidance. This could include:
Monitoring IP addresses
Tracking billing details and payment methods (e.g., credit/debit cards issued in Sri Lanka)
Cross-referencing user data with platform reporting
Requiring non-resident platforms to identify the location of users
The goal of this regulation is not only to collect tax revenue but also to ensure fair treatment for local digital service providers who are already subject to VAT. Therefore, enforcement mechanisms are likely to strengthen over time.
Final Thoughts
The Digital Services VAT is a much-needed step to modernize Sri Lanka’s tax system and ensure fair treatment between local and foreign service providers. Businesses and consumers alike should prepare for these changes coming into effect from 01st October 2025.
For detailed guidance on compliance and registration for non-resident service providers, stay tuned to TaxAdvisor.lk.
