✅ Lower VAT / SSCL-Registration Threshold
- The annual turnover threshold for mandatory registration under Inland Revenue Department (for VAT and Social Security Contribution Levy — SSCL) will be reduced from LKR 60 million to LKR 36 million with effect from 1 April 2026.
- This means more small and medium enterprises (SMEs) and smaller-scale businesses will be liable to register, file VAT returns and comply with VAT obligations under the law.
🌐 VAT on Digital Services by Non-Resident Providers (B2C) — Deferred till 1 April 2026
- Under the Amendment Act, VAT was to be applied on digital or electronic services supplied by non-resident service providers to Sri Lankan consumers (B2C) via electronic platforms (e.g., streaming services, cloud services, software-as-a-service, apps, online marketplaces, etc.).
- However, the implementation has been postponed. Although initially scheduled for October 1, 2025, the effective date is now 1 April 2026, giving non-resident providers more time to prepare for VAT compliance.
- Once in force, overseas digital service providers will need to register for VAT in Sri Lanka, charge 18% VAT on taxable supplies to local consumers, and remit the tax to the IRD.
- For B2B transactions (i.e., digital services supplied to VAT-registered businesses), likely the “reverse-charge” mechanism will apply (i.e., the Sri Lankan business will account for VAT).
🛒 Imported Goods: Coconut / Palm Oil & Fabric — Move from Special Levies to VAT
- The Amendment (or related 2026 Budget proposals) also envisions replacing existing special levies on certain imports (like coconut oil, palm oil, imported fabric) with the general VAT system, to align imported products’ tax treatment with locally produced goods.
- For example, imported coconut oil and palm oil — which earlier were subject to a fixed-per-kg Special Commodity Levy — will now be subject to VAT (at standard rate) and SSCL (if applicable).
- Similarly, any special levy or CESS on imported fabric is planned to be removed and replaced with VAT from April 2026.
🧾 VAT invoicing, compliance & refund mechanism: Continuation of recent reforms
- The Amendment Act includes updated rules around invoicing, particularly specifying that the “tax invoice” format must be as per instructions issued by the Commissioner-General.
- Additionally, under recent changes (from late 2025), the previously existing “Simplified VAT Scheme” has been abolished, replaced with a “Risk-Based Refund Mechanism” for eligible exporters and VAT-registered persons supplying to specified projects; refunds of excess input tax must be processed within a defined period.
💡 What This Means for Your Business / Consumers / Website Audience
- More businesses will be VAT-registered: With the threshold lowered to LKR 36 million/year, many SMEs previously under the limit will now have to register, maintain VAT-compliant bookkeeping, file regular returns, and (if selling) collect VAT.
- Foreign digital services will become costlier for consumers: If your website visitors subscribe to streaming, SaaS, apps, e-services from overseas providers — expect 18% VAT likely built into the prices from April 2026.
- Imported goods may become more expensive: Imported palm oil, coconut oil, fabric and similar items previously under per-kg fixed levies may face standard VAT, potentially increasing retail costs — though partly offset by removal of older levies / CESS.
- Need for proper invoicing and compliance: Businesses offering goods/services (especially with cross-border or imports) must align with the revised invoicing format, compliance and refund rules.
- Level playing field between local and foreign suppliers: By taxing digital services from overseas providers and imported goods under VAT rather than special levies, the amendments aim to equalize tax treatment between local and foreign businesses.
📌 What You Should Note (Important Caveats & Implementation Details)
- The VAT on digital services by non-residents is still contingent on final guidance and compliance rules to be issued by the IRD (for registration, collection, invoicing, reporting).
- The changes to import duties (tariff bands, para-tariffs phasing out) and shifting of special levies to VAT may evolve over time, especially for sensitive goods — so final customs and consumer prices may vary.
- Businesses currently below the turnover threshold should plan ahead — assess whether they approach LKR 36 million, and prepare accounting / invoicing systems accordingly.
- For exporters or project-based suppliers — understand the new “Risk-Based Refund Mechanism” clearly, to claim any input VAT refunds properly.