• Registration crucial for 18% VAT implementation on non-resident digital services
• Aims to level playing field, generate revenue; but will increase costs for consumers, providers

Sri Lanka should implement a registration system for non-resident digital service providers to add the proposed 18% value added tax (VAT) for digital services through platforms, KPMG Sri Lanka said.

It said that a careful drafting of the law is essential to ensure that non-resident service providers operating through digital platforms are included within the VAT framework.

“It is advisable to implement a registration system for non-resident digital service providers. Without such a system, the tax administrator may face challenges in ensuring that all relevant service providers are registered for VAT,” KPMG Sri Lanka said in its analysis of the budget.

Budget 2025 proposed to introduce provisions permitting the issuance of regulations to impose VAT on the supply of services through digital platforms in Sri Lanka, the regulations are set to cover registration, chargeability, tax collection, and filing of the return.

The imposition of VAT at the rate of 18% on digital services provided to Sri Lankan consumers by non-resident digital service providers was introduced as a tax reform under the IMF report published in June 2024.

Sri Lanka follows other Asian countries in taxing non-resident digital service providers as it shares the second top VAT rate imposed on digital service providers among Asian countries with India after Armenia.

The government aims to level the playing field between domestic and foreign digital service providers while the VAT on non-resident digital service providers is expected to garner tax revenue of 0.04% of GDP in 2025.

The service providers will need to charge, collect, and remit VAT for services provided to customers in Sri Lanka, where the customers will see price increases on digital services and service providers will face compliance costs.