May 24, 2025

18% VAT on Digital Services – The Effect for Sri Lankan Consumers

VAT on Digital Services – What It Means for Sri Lankan Consumers Inner

Starting April 1, 2025, Sri Lanka will enforce an 18% Value Added Tax (VAT) on digital services provided by non-resident entities to consumers in the country. This move aligns Sri Lanka with a growing global trend of taxing the digital economy and is expected to significantly impact both consumers and foreign service providers operating within Sri Lanka’s digital landscape.

What Are Digital Services?

Digital services refer to products or services delivered over the internet or through other digital platforms. These include:

  • Streaming platforms (e.g., Netflix, Spotify, YouTube Premium)
  • Cloud storage services (e.g., Google Drive, Dropbox)
  • Online advertising platforms (e.g., Meta Ads, Google Ads)
  • Software-as-a-Service (SaaS) products (e.g., Microsoft 365, Adobe Creative Cloud)
  • Online marketplaces and app stores (e.g., Amazon, Apple App Store)

If these services are consumed by individuals or businesses in Sri Lanka, they are now subject to the 18% VAT.

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Who Will Collect the Tax?

Under the new regulation:

  • Non-resident digital service providers must register with the Inland Revenue Department (IRD) of Sri Lanka.
  • They are responsible for collecting the 18% VAT from Sri Lankan users and remitting it to the IRD.
  • Failure to comply may result in penalties and potential blocking of access in Sri Lanka.

This tax is similar to the digital VAT frameworks adopted by countries such as India, Australia, and members of the European Union.

How Will This Affect Consumers?

Sri Lankan consumers will now see higher prices on their favorite digital platforms. For example:

  • A monthly Netflix plan that costs $10 will now cost approximately $11.80.
  • Businesses using tools like Zoom Pro or Google Workspace may face increased subscription costs.

For individual consumers, this means budgeting slightly more for monthly digital expenses. For businesses, especially startups and SMEs reliant on global SaaS tools, it adds to operational costs.

Why Is Sri Lanka Introducing This Tax?

There are several strategic reasons for this policy:

Level Playing Field – Local digital service providers are already paying VAT. Taxing foreign companies levels the competitive field.

Revenue Generation – Digital services are a major part of consumer spending. Taxing them increases government revenue.

Global Compliance – The OECD and international tax forums recommend VAT on cross-border digital transactions to reduce base erosion and profit shifting (BEPS)

 What Should Businesses Do?

For Sri Lankan businesses that rely on digital services, consider the following:

  • Reassess your software budget to account for the tax increase.
  • Ensure invoices reflect VAT if you’re dealing with foreign suppliers.
  • Review your tax input claims — in some cases, businesses may be eligible to reclaim VAT paid, depending on local regulations.

For Foreign Service Providers

If your business provides digital services to Sri Lankan users, you need to:

  • Register with the Sri Lankan IRD
  • File VAT returns regularly
  • Be transparent in pricing, clearly showing the VAT component in invoices

Failure to comply may lead to restricted access, penalties, or legal consequences

Conclusion

The 18% VAT on digital services marks a pivotal moment in Sri Lanka’s tax landscape. It reinforces the country’s commitment to taxing the digital economy while aligning with international best practices. Both consumers and service providers must now navigate this new normal, with careful planning, transparency, and compliance.

Need help understanding how this VAT applies to your business or subscriptions? Contact a qualified tax consultant or reach out to GAJMA & Co. for expert guidance.