| Update: | Compliance Alert – Major VAT changes for digital services, e-filing and new rules |
| Date: | 2025-05-07 |
The Inland Revenue Department of Sri Lanka has announced significant changes under the Value Added Tax (Amendment) Act No. 04 of 2025, certified on April 11, 2025.
The announcement considers the following key updates effective on various dates.
VAT on digital services by non-residents as of October 1, 2025
Non-resident persons supplying services through electronic platforms to customers in Sri Lanka will be subject to VAT. Registration and compliance guidelines will be issued later. The requirement enters into force on October 1, 2025.
Abolition of the simplified VAT scheme
The existing Simplified VAT Scheme ends on October 1, 2025. It will be replaced by a Risk-Based Refund Mechanism for eligible exporters and those supplying over 50% to strategic or approved projects, with refunds issued within 45 days of the VAT return due date.
Zero-rated supplies – foreign currency condition
Zero-rated supply benefits are now tied to foreign currency payments received via licensed banks within six months. However, the disallowance of input tax deductions for delayed payments applies only until April 10, 2025.
Mandatory VAT registration for importers/exporters
All commercial importers and exporters must register for VAT, regardless of turnover.
Supplies treated as zero-rated
Effective from January 1, 2024, these include free/subsidized employee meals and transport, certain reinsurance receipts in foreign currency, and unused official stamps.
E-filing of VAT returns
As of July 1, 2025, VAT returns must be filed electronically. Manual submissions require the Commissioner-General’s approval.
New definition – unprocessed agricultural products
Covers minimally processed plant-based goods for sale. This definition does not affect the VAT liability on eggs, which are taxable at 18% from January 1, 2024.
Exemptions
New exemptions apply from April 11, 2025:
- Chemical naphtha for electricity generation;
- Liquid milk and yoghurt made with at least 50% locally produced fresh milk.
VAT exemptions are removed for the import of specific aircraft engines and spare parts.