Key Value Added Tax (VAT) Changes in Sri Lanka – What Businesses Need to Know

On April 11, 2025, Sri Lanka certified the Value Added Tax (Amendment) Act No. 04 of 2025, bringing several changes to the VAT Act No. 14 of 2002. These amendments have far-reaching implications for businesses, especially those involved in digital services, exports, and commercial trading. Below, we break down the key updates and why they matter.

1. VAT on Digital Services Supplied by Non-Resident Entities

Starting October 1, 2025, non-resident digital service providers will be required to pay VAT for services supplied to Sri Lankan customers. This includes platforms offering streaming, cloud services, and online subscriptions. The Commissioner-General will issue detailed guidance on registration and compliance procedures.

🔹 Why it matters:

• Expands Sri Lanka’s tax net to international digital businesses.
• Ensures fair taxation between local and foreign service providers.
• Businesses using foreign digital services should prepare for potential price increases.

2. Abolition of Simplified VAT Scheme & Risk-Based Refunds

The Simplified VAT Scheme will be abolished from October 1, 2025, and replaced with a Risk-Based Refund Mechanism for eligible exporters and strategic suppliers. Refunds will be processed within 45 days, subject to proper VAT return submissions.

🔹 Why it matters:

• Exporters benefit from structured refund timelines.
• Businesses involved in strategic projects can anticipate faster VAT recovery.
• Stronger compliance measures in place for VAT claims.

3. Mandatory VAT Registration for Commercial Importers/Exporters

Regardless of turnover thresholds, all commercial importers and exporters must register for VAT under this amendment.

🔹 Why it matters:

• Helps streamline tax collection from import/export businesses.
• Ensures stronger oversight and compliance in international trade.
• Businesses must review VAT obligations and update registration status accordingly.

4. Zero-Rated Supplies – New Categories

From January 1, 2024, certain categories will be zero-rated for VAT, including:

• Employer-provided meals & transport (if within specified conditions).
• Reinsurance commissions & foreign currency compensation to local insurers.
• Unused government or provincial revenue stamps (at face value).

🔹 Why it matters:

• Encourages businesses to improve employee benefits.
• Strengthens the insurance industry’s cost structure.
• Reduces tax burdens on specific government transactions.

5. Mandatory Electronic Filing of VAT Returns

From July 1, 2025, all VAT returns must be filed electronically, with manual returns allowed only under exceptional approval by the Commissioner-General.

🔹 Why it matters:

• Pushes Sri Lanka toward full digital tax compliance.
• Reduces processing time and streamlines return submissions.
• Businesses must transition to electronic tax filing systems.

6. New Definition for “Unprocessed Agricultural Products”

The amendment formally defines “unprocessed agricultural products” as those cultivated on land or in greenhouses, including those processed through cleaning, grading, or chilling.

🔹 Why it matters:

• Provides clarity for agricultural businesses in VAT compliance.
• Defines tax applicability for raw produce suppliers.

7. VAT Exemptions – New Additions

Effective April 11, 2025, the following items are exempt from VAT:

• Chemical naphtha supplied to the Ceylon Electricity Board for power generation.
• Liquid milk and yoghurt with at least 50% locally sourced fresh milk.

🔹 Why it matters:

• Supports domestic dairy producers.
• Affects pricing dynamics in the energy and food sectors.

8. Removal of VAT Exemptions

Certain previous exemptions are now removed, including:

• Import of aircraft engines and spare parts, identified under the Harmonized Commodity Coding System.

🔹 Why it matters:

• Aviation businesses must factor in VAT costs for imports.
• Might impact the maintenance cost of air transport.

Final Thoughts

These VAT amendments signal a significant shift in Sri Lanka’s tax landscape—enhancing compliance, expanding the tax base, and digitizing filing processes. Businesses need to prepare ahead, reassess their VAT registration, and adjust pricing strategies where necessary.

For official details, visit the Inland Revenue Department’s website or consult a tax expert for guidance.