Proposed Amendments to Value Added Tax (VAT) Act in 2025

The Sri Lankan government has introduced significant amendments to the Value Added Tax (VAT) Act, No. 14 of 2002, through the VAT (Amendment) Bill of 2025. These changes, set to take effect from 01.04.2025, aim to modernize VAT administration, expand the tax base, and introduce new compliance measures. Below is a breakdown of the key changes.

1. VAT on Digital Services by Non-Residents

  • VAT will be imposed on services provided by non-resident persons through electronic platforms (e.g., streaming services, digital ads, software subscriptions).
  • Effective from April 1, 2025, non-resident persons must register and pay VAT for digital services they are providing 
  • Who is a Non resident person ?- non-resident person” means any person who occasionally undertakes transactions involving supply of services, whether as principal or agent or in any other capacity, but who has no fixed place of business in Sri Lanka, and does not include a person registered under section 10, where such person carries on or carries out a taxable activity in Sri Lanka without a fixed place of business but having an agent to act on behalf of such person as referred to in section 55

2. Abolition of the Simplified VAT Scheme & Introduction of a Refund System

  • The Simplified VAT Scheme is abolished.
  • A new VAT refund system (Risk Based Refund Scheme) will replace it, specifying who qualifies and how refunds will be processed.

3. Zero-Rated VAT for Certain Supplies

The following items and services will now be treated as zero-rated (0% VAT):

  • Meals and transport provided by employers to employees, either free or at a subsidized rate.
  • Reinsurance commissions or foreign currency compensation received by local insurance companies from overseas reinsurers.
  • Unused postage & revenue stamps of the government or provincial councils, based on their face value.

4. Mandatory VAT Registration for Importers & Exporters

  • Any person importing or exporting goods for commercial purposes must register for VAT, regardless of the standard VAT registration threshold or any exemptions they previously had.

5. Changes to VAT Invoice Format

  • The Commissioner-General will specify a standard format for VAT invoices, which all registered businesses must follow.

6. Mandatory Electronic Filing of VAT Returns

  • From July 1, 2025, all businesses must submit VAT returns electronically.
  • A digital acknowledgment will be issued when a return is filed.
  • In special circumstances, written submissions may still be allowed at the discretion of the Commissioner-General.

7. VAT Refund for Employer-Borne Meal & Transport Costs

  • Employers who outsource meal and transport services for employees will now be able to claim input VAT credits on these costs.

8. New Mechanisms for Tax Recovery

  • A new section (48B) allows for the immediate recovery of undeclared and unpaid VAT.
  • Non-resident service providers failing to pay VAT will be held liable for tax payments.

9. VAT Rate Increase for Certain Transactions

  • The VAT rate will increase from 6% to 10% starting October 1, 2025, for certain taxable supplies.

10. Expansion of VAT-Exempt List

The following goods and services will be added to the  exempt  List

  • Chemical naphtha supplied to the Ceylon Electricity Board for electricity generation.
  • Liquid milk and yogurt made from locally sourced fresh milk.
  • Aircraft engines and spare parts imported before the new law comes into effect.

11.Definitions Introduced & Tax Period Changes

  1. Eligible Exporter → A registered person whose zero-rated supplies exceed 50% of total sales in the preceding calendar year.
  2. Unprocessed Agricultural Products → Any plant-based product cultivated on land or in a greenhouse, including those that have undergone cleaning, sizing, sorting, grading, cutting, or chilling but have not been processed further for sale.
  • Taxable Period Adjustments:
    • Before April 1, 2025 → Quarterly VAT returns.
    • After April 1, 2025 → Businesses can file VAT returns either monthly or quarterly, with written approval.

Conclusion

These amendments mark a major shift in Sri Lanka’s VAT system, with a strong focus on:

✅ Expanding VAT coverage to digital services
✅ Enhancing compliance through electronic filing
✅ Replacing the Simplified VAT Scheme with a structured refund system
✅ Introducing stricter enforcement for unpaid VAT

Source : Value Added Tax (Amendment) - GS- 2025-02-21 (560/2025)

Request Details

Related Articles