Digital VAT in Sri Lanka: Why platform liability and reverse charge are essential to avoid costing households and Treasury-by Suresh R.I Perera
Source:FT
Executive summary
Sri Lanka’s VAT on cross-border digital services, in force since July 2026, is a necessary and overdue reform, but its design is incomplete. It relies only on registration by non-resident suppliers and fully carves out supplies to VAT-registered businesses. Without platform liability and a B2B reverse charge, it will likely under-collect and place the entire new burden on households.
Key points
Background:
The reform was IMF-backed, with a modest expected yield (0.04-0.08% of GDP). Its stronger case is equal treatment of local and foreign suppliers. It was delayed twice before Act No. 14 of 2026 confirmed the July start.
Weak enforcement:
The Inland Revenue Department would have to chase foreign vendors with no local presence. Large brands may register, but smaller providers likely won’t.
B2B carve-out: (Supplies made to local VAT registrants):
Reverse charge would raise real revenue from banks, financial institutions, life insurance companies and other VAT registered companies who are prevented from claiming full VAT input credit, which are exempt from invoice-credit VAT and therefore cannot claim input tax credits under that mechanism, while also creating an audit trail. The carve-out forgoes this, loses visibility, and leaves local providers at a disadvantage.
Equity:
Individuals pay digital VAT while businesses buying the same services pay nothing, which undercuts the aim of base broadening and any future cut to the 18% rate.
Global practice:
Simplified registration for B2C supplies and reverse charge for B2B supplies are widely used internationally. Platform liability is also increasingly adopted, including in the EU, UK, Australia, Canada and Singapore, but its scope varies. OECD guidance presents platform liability as an effective policy option.
Recommendation:
Keep simplified registration for B2C supplies, add platform liability for marketplaces, app stores, and replace the B2B carve-out with reverse charge. Support these with clear location-indicator guidance, proportionate penalties and data-sharing with financial institutions.
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