Sri Lanka Enacts Major VAT Reform Package Including Digital Services VAT Framework

• VAT Amendment Act formally enacted: Sri Lanka’s Parliament enacted the Value Added Tax (Amendment) Act No. 14 of 2026, which was certified on 30 June 2026 and published in the Official Gazette on 3 July 2026. The Act introduces several significant changes to the VAT regime, including digital economy taxation, VAT registration rules, and sector-specific provisions. [documents.gov.lk], [kpmg.com]
• Digital services VAT implementation deferred: The Act postpones the commencement of VAT on certain services supplied through electronic platforms from 1 October 2025 to 1 July 2026, giving affected businesses additional time to prepare for the new compliance obligations. [documents.gov.lk], [documents.gov.lk]
• Broader VAT reforms introduced: The amendments also include provisions covering VAT on non-resident digital service providers, an increase in the VAT rate on financial services to 20.5%, changes to input tax credit rules, administrative amendments, and specific relief measures for the film exhibition and garment sectors. [kpmg.com], [documents.gov.lk]

Article

The Sri Lankan government has officially enacted the Value Added Tax (Amendment) Act No. 14 of 2026, with the legislation published in the Official Gazette on 3 July 2026 following certification by the Speaker on 30 June 2026. The amendments form part of a broader modernization of the country’s VAT framework and contain several measures that businesses should assess carefully. [documents.gov.lk], [kpmg.com]

One of the most notable changes is the postponement of the effective date for VAT on certain services supplied through electronic platforms. The legislation amends the relevant provision so that the rules will apply from 1 July 2026 rather than 1 October 2025, effectively providing a nine‑month extension for affected taxpayers to prepare their systems and compliance processes. [documents.gov.lk], [documents.gov.lk]

The Act also establishes a comprehensive framework for taxing non-resident digital service providers. Overseas suppliers exceeding prescribed turnover thresholds will be required to register for Sri Lankan VAT, file electronic returns, and remit VAT on taxable digital services supplied to Sri Lankan customers. The legislation includes rules for determining whether a customer is located in Sri Lanka and introduces a specific exclusion for supplies made to VAT-registered businesses. [kpmg.com], [documents.gov.lk]

In addition, the amendments increase the VAT rate applicable to financial services from 18% to 20.5% with effect from 1 July 2026, revise certain input tax credit provisions, and introduce sector-specific changes. These include allowing entertainment tax charged by local authorities to be deducted when determining the VAT value of film exhibition services and extending zero-rating treatment for qualifying garment buying office services supplied to overseas customers. [kpmg.com], [documents.gov.lk], [documents.gov.lk]

Businesses operating in Sri Lanka, particularly digital service providers, financial institutions, and multinational groups supplying services into the country, should review the legislative changes and assess the impact on VAT registration, invoicing, reporting, pricing, and ERP configurations ahead of the various effective dates. [documents.gov.lk], [kpmg.com]

Sources

• Sri Lanka Value Added Tax (Amendment) Act No. 14 of 2026 (Official Gazette, 3 July 2026) [documents.gov.lk]
• Statement of Legal Effect accompanying the VAT Amendment Bill [documents.gov.lk]
• KPMG TaxNewsFlash – Sri Lanka: VAT (Amendment) Act No. 14 of 2026 [kpmg.com]