Major VAT Changes Coming in 2026 – Are Your Business Systems Ready?
May 04, 2026
The Government of Sri Lanka has issued the Value Added Tax (Amendment) Bill on 29 April 2026, proposing significant changes to the VAT system.
Important:
This is currently a Bill and will become law only after:
- Approval by Parliament
- Certification by the Hon. Speaker
Until then, these remain proposed changes, but businesses should start preparing early.
1. Expansion of VAT Net – Threshold Reduced (Effective from 01 July 2026)
One of the most important changes is the reduction of the VAT registration threshold to:
- Rs. 36 Mn annually
- Rs. 9 Mn per taxable period
Effective from 01 July 2026
This will significantly increase the number of VAT-registered businesses, especially SMEs, requiring them to comply with VAT obligations such as invoicing, record keeping, and return filing.
2. VAT on Digital Services – New Regime (Effective from 01 July 2026)
VAT will be imposed on digital services provided by non-resident service providers, effective from 01 July 2026.
This applies to:
- Online advertising (Google, Facebook)
- Software subscriptions
- Digital platforms, education, healthcare services
A service will be considered supplied in Sri Lanka based on factors such as:
- Billing address
- Payment method
- IP address location
Non-resident providers must register within 3 months of exceeding thresholds.
Where the customer is VAT-registered, VAT may not apply or can be claimed as input tax.
3. VAT on Financial Services Increased (Effective from 01 July 2026)
The VAT rate on financial services will increase from 18% to 20.5%, effective 01 July 2026.
Additionally, definitions are aligned with the Inland Revenue Act, and dividend income is clarified.
This will increase the cost of:
- Loans
- Leasing
- Banking services
4. Input Tax Changes (Effective upon enactment / 01 April 2026 for stock relief)
The Bill introduces both restrictions and relief:
- Input VAT is disallowed where goods imported under re-export schemes are not re-exported within the required time
- Deemed input tax is allowed on unsold stock at the time of VAT registration (mainly for wholesale/retail traders)
Stock relief applies from 01 April 2026, subject to proper documentation.
5. Mandatory POS Systems (Effective within 3 months from CGIR notice)
All VAT-registered businesses will be required to use secured POS systems approved by the Inland Revenue Department.
These must:
- Record transactions in real time
- Generate invoices
- Capture turnover accurately
Implementation will be required within 3 months from the date specified by CGIR.
6. Stronger Penalties & New Offences (Effective from 01 October 2025)
The Bill significantly strengthens enforcement:
- Maximum penalties increased up to Rs. 1 million
- New offences introduced for:
- Fraudulent refund claims
- False or misleading information
- Failure to provide valid documents
These provisions apply from 01 October 2025, meaning enforcement is already tightening.
7. Public Disclosure of VAT Information (Effective upon enactment)
The Inland Revenue Department will be empowered to publish:
- Name
- Address
- VAT registration status
This will increase transparency and create reputational risk for non-compliant businesses.
8. Sector-Specific & Technical Changes (Effective from 01 October 2025 / Upon enactment)
Several targeted changes are introduced:
- Garment buying offices: Zero-rated if services are provided to overseas clients in foreign currency (Effective from 01 October 2025)
- Entertainment industry: Entertainment tax can be deducted when calculating VAT (Upon enactment)
- Strategic Importance Businesses (e.g., Port City): VAT exemptions introduced (Upon enactment)
- Digital services scope clarified including education and healthcare (Effective from 01 July 2026)
9. Administrative & Legal Enhancements (Effective upon enactment)
Additional improvements include:
- VAT schedules can be submitted from the beginning of the taxable period
- Legal protection for officers under the risk-based refund scheme
- VAT write-off for tsunami-related projects
- Introduction of new definitions such as:
- Electronic platform
- Non-resident person
- Fixed place
- Digital services follow normal VAT rules on time and value of supply
- Sinhala text prevails in case of inconsistency
10. Conclusion
The VAT Amendment Bill 2026 represents a major transformation of Sri Lanka’s VAT system with clear effective timelines:
- 01 October 2025 → Penalties, offences, garment sector changes
- 01 April 2026 → Deemed input tax on stock
- 01 July 2026 → Core changes (threshold, digital VAT, financial services VAT)
- Post-enactment → Administrative and structural changes
Final Reminder
This is not yet law.
It will take effect only after:
✔ Parliamentary approval
✔ Certification by the Hon. Speaker
Businesses should start preparing now to avoid future compliance risks.
