Sri Lanka is planning to slap an 18% Value-Added Tax (VAT) on platforms like PayPal and Stripe starting October, a move that is already raising eyebrows among freelancers, tech firms, and tax experts. For a country trying to modernise its tax system under the watchful eye of the International Monetary Fund (IMF), this move is bound to stir debate.

The rule brings payment processors into the VAT net, treating them like any other digital service. But in countries with more stable tax frameworks, services like PayPal are usually VAT-exempt, because they are financial services. Stripe, too, is typically handled through reverse charge mechanisms where the end user takes on the tax burden, not the platform.

So why is Sri Lanka choosing a different path? And more importantly, is this move even in line with the commitments made under its IMF programme?

The IMF has already flagged Sri Lanka’s 2.5% tax on foreign card payments as a distortion to external payments. Now, adding VAT on top, possibly doubling the tax burden for some users, could trigger more questions about whether the country is slipping into Multiple Currency Practice (MCP) territory, which it had promised to avoid.

Meanwhile, those who actually use these platforms – freelancers, digital agencies, and tech startups – say they have had little to no communication from the Government or the Inland Revenue Department (IRD). For them, it is a question of survival in a market that is already hard to survive in.

Clearing up the confusion

According to KPMG Sri Lanka Tax and Regulatory Division Principal Suresh Perera, recent concerns about whether Sri Lanka’s digital VAT may fall under IMF definitions of MCPs are unfounded.

He clarified that the 2.5% stamp duty levied under the Stamp Duty (Special Provisions) Act, specifically Section 4, applied when the credit card service provider issued a claims request to the cardholder for the transaction amount. This duty is charged only on credit card transactions, not debit cards.

“The value of supply in this case is $ 100 and the stamp duty is calculated as 2.5% on that,” Perera explained. “But it is important to note that VAT is not calculated on the value inclusive of stamp duty. It is only on the value of supply as defined in Section 5 of the VAT Act.”

This distinction is important because there is a common misconception that VAT, or ‘digital VAT,’ as referred to in international contexts, should be calculated on the total value including stamp duty. Perera stressed that such an approach would be incorrect. He further pointed out that even though stamp duty was an additional charge on credit card payments, it did not form part of the taxable base for the purposes of digital VAT.

“The digital VAT is calculated solely on the value of the service, excluding stamp duty,” he said. “There is no cascading tax on the stamp duty amount.”

He also addressed speculation that this tax structure might qualify as an MCP under IMF guidelines, firmly rejecting that interpretation. “Sri Lanka’s 18% digital VAT on non-resident providers of services via electronic platforms, taken in isolation, is not related to the IMF’s concept of Multiple Currency Practices,” he said.

As he explained, MCPs involve cases where different exchange rates are applied to different types of international transactions, often leading to market distortions. Sri Lanka’s digital VAT does not involve currency conversion rates, nor does it create multiple exchange rate regimes. It is simply a tax policy measure designed to bring non-resident digital service providers into the country’s VAT net.

“This is a revenue and compliance measure, not a macro-financial or capital flow management tool,” Perera noted.

He added that Sri Lanka’s approach was consistent with Organisation for Economic Co-operation and Development (OECD) VAT/Goods and Services Tax (GST) Guidelines and had been adopted by over 100 jurisdictions worldwide. Furthermore, he explained that the VAT on digital services did not restrict or regulate the flow of capital across borders. As such, it does not fall within the IMF’s definition of Capital Flow Management Measures (CFMs) either.

Another senior tax expert from a leading firm explained that Sri Lanka’s current approach to digital VAT left significant implementation gaps when it came to global platform-based service transactions. Using Fiverr as an example, he illustrated how the complexities of platform-based gig work challenged the simplicity of current enforcement models.

“When I download Fiverr from the App Store and hire a software developer in Bangladesh, I – the Sri Lankan consumer – receive the service. But the platform collects the payment and takes a 30% cut before paying the freelancer,” he said. “That means the payment to the platform isn’t coming from me; it’s coming from the freelancer’s share.”

This structure, he noted, presents challenges in enforcement. Under the current model, the foreign gig worker, who earns income from Sri Lankan users, is technically liable to register for VAT if their income exceeds Rs. 60 million. However, the IRD is not in a practical position to enforce compliance against such individuals.

“Sri Lankan authorities have no real way of going after a software engineer in Bangladesh who doesn’t register. That’s the problem,” he noted.

Globally, other jurisdictions have adopted more enforceable models. For example, under OECD guidelines and in countries like India, there are provisions that place VAT collection responsibility on the platform itself when dealing with resident service providers. This helps close the enforcement gap in cases where individual non-resident freelancers are unlikely to comply voluntarily.

He explained that the Sri Lankan law had yet to fully accommodate these models. “In other countries, they impose liability on the platform to collect and remit VAT on behalf of non-resident suppliers. We haven’t done that yet,” he said.

The tax expert also drew attention to another grey area: how different forms of software are treated under VAT law. Under the current VAT Act, tailor-made software is classified as a service, while off-the-shelf software is treated as goods. This has significant implications for digital VAT, which only applies to cross-border services.

“If you download ready-made software from a platform like Apple’s App Store, there’s an argument that it’s a good, not a service, and therefore outside the scope of digital VAT,” he said.

He cautioned that such classification issues, combined with unclear platform liabilities, exposed the gaps in the current law. The digital VAT regulation, while modelled on OECD best practices, lacks the nuanced treatment required to handle platform-based gig work, complex supply chains, and bundled digital services.

“These rules were rolled out without fully thinking through the legal layers behind modern digital transactions,” he observed. “Sooner or later, they will have to revisit the legislation and add those missing pieces.”

Impact on the economy

Sri Lanka’s digital economy, currently valued at just under $ 4 billion, is expected to grow to $ 15 billion by 2030. However, cybersecurity and AI policy expert Asela Waidyalankara told The Sunday Morning that introducing taxation at this stage would directly contradict this policy goal. “When you want growth, especially from a policy point of view, introducing taxation to that is stifling,” he said.

He explained that gig workers, freelancers, and creatives formed the backbone of the country’s digital economy, yet were likely to be the first impacted by taxes on digital services. Many rely on tools like Google Drive, cloud-based design platforms, or collaboration software essential to their work. Any cost increases, he warned, would immediately affect their ability to operate.

He added that digital creatives and freelancers often worked on fixed-term contracts with international clients, making it nearly impossible to adjust project fees midway in response to new tax-related costs. “You can’t change your costing midway and say, ‘By the way, I will have to add 16% for the last three months.’ You either absorb that cost or run at a loss.”

On enforcement, Waidyalankara stated that while large economies like the European Union (EU) or the US had the leverage to impose such taxation, Sri Lanka lacked similar bargaining power. “Implementation-wise, there remain some grey areas,” he noted, pointing out the challenges of enforcing tax compliance across borders.

Instead of focusing prematurely on taxing the sector, he called for increased digital participation locally. “We should be thinking about bringing more people into the digital economy,” he said, urging greater investment in platforms like LankaPay and LankaQR and support for tech entrepreneurship.

Tech entrepreneurs, freelancers clueless 

Zooz Labs LLC Founder Dilshan Maduranga said the changes would affect not only large firms but also thousands of individual professionals who relied on international tools and platforms to do business.

“While PayPal and Stripe aren’t fully supported in Sri Lanka, the VAT applies broadly to all tech-related services,” he said. “This includes payments made for hosting, cloud platforms, software subscriptions, and tools used by almost every tech company or freelancer.”

A key concern raised by Maduranga is the lack of clarity and guidance around how the new VAT rules will be implemented. Most professionals in the digital space, he explained, became aware of the tax changes only through informal channels. Official communication, whether from the IRD or relevant ministries, has been minimal or non-existent.

“The rollout of these changes has been vague and poorly communicated,” he said. “There’s no official guideline or proper support from the Government or the IRD on how exactly this will be implemented.”

He also warned that the increased cost burden would directly impact the competitiveness of Sri Lankan freelancers on international platforms. With clients often comparing service providers across borders, higher prices can lead to lost business or tougher negotiations.

In addition to financial strain, Maduranga pointed to an ongoing issue faced by freelancers in Sri Lanka – a lack of recognition by financial institutions. Despite being compliant with tax obligations, many are routinely denied access to credit cards, loans, or other business services simply because they don’t work for a traditional employer.

“At the moment, it feels like we’re taxed but ignored,” he said. “If banks and institutions recognised the contribution of freelancers and digital entrepreneurs, by offering financial products, support, or even just acknowledgment, then more people would be happy to comply and pay taxes.”

Nadeesha Perera, 29, a freelancer working full-time on Fiverr, said the hardest part about the new VAT policy was the uncertainty.

“Nobody knows exactly what applies, what doesn’t, or how we’re supposed to report it,” she said. “I found out about the VAT from a Facebook post. I haven’t seen a single email, notice, or guideline from any Government body.”

While she uses platforms like Canva, Grammarly, and Notion to serve overseas clients, she explained that there had been no official communication about whether subscriptions to these services fell under the new tax rules, or how enforcement would work for freelancers such as her who did not run registered companies.

“What’s worrying is that everything feels ad hoc. One day you hear that cloud tools are taxed, the next day someone says it is only platforms with physical presence. There’s no FAQ, no one to ask, and no consistent answer,” she said.

She described the freelance writing community as “on edge,” not because people were avoiding the tax, but because they genuinely did not know what compliance looked like. Some worry about retroactive penalties, while others are considering stopping their subscriptions to stay under the radar.

“It’s like freelancing in the dark. We’re being taxed on a system no one has explained to us,” she said.

Perera also noted that most freelancers did not have access to accountants or legal advice. Many are self-taught writers, designers, and developers who entered the digital economy out of necessity during the economic crisis or the pandemic.

“People assume we’re all tech-savvy and financially literate, but most of us are figuring this out on our own. Now we’re expected to somehow file VAT returns for tools we buy online with personal cards,” she said. “It’s overwhelming.”

She acknowledged that taxation was important, but said that rollout should be transparent.

Govt. stance 

All attempts by The Sunday Morning to reach Deputy Minister of Digital Economy Eranga Weeraratne proved futile. Moreover, despite attempts to reach Deputy Minister of Economic Development Anil Jayantha Fernando and Treasury Secretary Harshana Suriyapperuma, none responded to queries. 

However, defending the decision in Parliament, Deputy Minister Fernando said the expansion of VAT to cover foreign digital services was about creating fairness, not introducing a brand-new tax.

“Local operators like PickMe have been paying VAT for years, while global platforms such as Uber were outside the net. From October, that imbalance will be corrected and Uber too will fall under the same rules,” he said. 

He reminded MPs that this measure had been announced in the 2025 Budget but postponed from April to October in order to give companies time to make the necessary adjustments.

Under the revised rules, any digital service consumed in Sri Lanka will attract VAT, whether the provider is based in Colombo or California. “If a service is used here, it will be taxed here,” Fernando explained.

However, there has been widespread criticism from the Opposition since the announcement of this policy decision.

What the 18% digital VAT means for SL

• Policy shift: Sri Lanka plans to impose an 18% VAT on non-resident digital service providers like PayPal, Stripe, Netflix, and Spotify starting October. 
• The impact: The tax affects not just tech companies and freelancers, but also everyday users who rely on tools like Canva, Grammarly, Notion, cloud services, or streaming platforms for work, learning, or entertainment.
• Freelancer burden: Many self-employed creatives and digital professionals, often with limited financial literacy or tax support, will now be required to navigate complex VAT compliance, often without any formal guidance.
• Lack of communication: Most users only learnt about the tax through social media or informal sources. There has been little to no official communication from the IRD or relevant authorities.
• IMF concerns: The move comes amid IMF oversight, raising questions about whether layering VAT on top of the existing 2.5% foreign card stamp duty violates Sri Lanka’s pledge to avoid Multiple Currency Practices (MCPs). Experts, however, argue that the VAT structure does not qualify as an MCP.
• Clarification on stamp duty: The 2.5% stamp duty applies only to credit card transactions, not debit cards, and VAT should not be calculated on an amount inclusive of this duty, avoiding cascading taxes.
• Compliance confusion: With no central FAQ, guideline, or helpline, many freelancers fear accidental non-compliance or retrospective penalties, especially those not operating as registered companies.
• Platform enforcement gap: Sri Lanka has not adopted OECD-style enforcement models that require digital platforms to collect and remit VAT on behalf of non-resident suppliers, leaving compliance difficult to implement in cross-border gig work.
• Fiverr dilemma: On platforms like Fiverr, where payments go through the platform and not directly from the Sri Lankan client, it becomes unclear who is liable – the platform, the freelancer, or the client.
• Software classification issues: Under Sri Lankan VAT law, tailor-made software is taxed as a service, while off-the-shelf software is treated as a good, meaning ready-made apps may fall outside the scope of digital VAT, adding further ambiguity.
• Economic contradiction: Experts say taxing digital services now contradicts Sri Lanka’s ambition to grow its digital economy from under $ 4 billion to $ 15 billion by 2030.
• Cost-of-living effect: The VAT will likely make essential digital services more expensive, directly affecting freelancers’ profitability and consumers’ access to entertainment and productivity tools.
• Global mismatch: Countries like India have implemented stronger frameworks where platforms are responsible for VAT collection. Sri Lanka lags behind, relying on user compliance rather than platform enforcement.
• Banking barriers: Many freelancers still face rejection from banks for credit cards or business loans despite paying taxes, adding to a sense of being taxed but ignored.
• No flexibility for contracts: Freelancers working on fixed-rate international contracts can’t simply raise prices mid-project to absorb new taxes, forcing them to either absorb losses or reconsider their viability in the market.