VAT (Amendment) Bill 2026: What businesses and consumers need to know – By Suresh R. I. Perera

VAT (Amendment) Bill 2026: What businesses and consumers need to know – By Suresh R. I. Perera

Source : sundayobserver.lk

Sri Lanka’s Value Added Tax (VAT) landscape is set for a significant transformation. The VAT (Amendment) Bill 2026, gazetted on April 29, 2026, proposes a series of amendments to the Value Added Tax Act, No. 14 of 2002 that will touch virtually every corner of the economy, from the corner shop to the multinational streaming platform.

Parliament is now poised to consider a Bill that is, in many respects, the most comprehensive revision of the VAT framework in recent years.

Lower registration threshold

Perhaps the most immediate consequential change is the reduction in the VAT registration threshold.

From July 1, 2026, any person carrying on a taxable activity in Sri Lanka will need to register if taxable supplies in a quarter exceed Rs. 9 million or in any rolling twelve-month period exceed Rs. 36 million. This marks a meaningful tightening relative to the current thresholds, and the practical impact is considerable.

Many small and medium-sized enterprises that have operated comfortably beneath the existing registration limits will now find themselves drawn into the VAT system.

For businesses, this means investment in accounting systems, return-filing disciplines, and compliance infrastructure. For consumers, it is reasonable to expect some upward pressure on prices as newly registered businesses pass through their VAT liability.

A new chapter for digital services

The Bill’s most architecturally significant provision is the insertion of new Chapter IIIC, which establishes a dedicated registration and payment regime for non-resident digital service providers.

Platforms such as streaming services, online learning providers, and software-as-a-service operators supplying services to people in Sri Lanka need to register and remit VAT if their Sri Lankan revenues exceed the same thresholds, Rs. 36 million annually or Rs. 9 million per quarter, from July 1, 2026.

The Bill employs a pragmatic “two-factor test” to determine whether a recipient is located in Sri Lanka, drawing on billing address, payment instrument, bank of payment, and internet protocol address. Where a recipient is a VAT-registered business, the digital services VAT will not apply.

However, where services are supplied to unregistered consumers, the non-resident provider must collect and remit VAT at the standard rate of eighteen percent.

Rate change on financial services

The Bill proposes increasing the VAT rate on financial services from 18 percent to 20.5 percent for taxable periods commencing on or after July 1, 2026. Banks, finance companies, and other specified institutions will experience this change.

However, this should not impact the prices of financial services as 2.5% Social Security Contribution on financial services has been abolished to amalgamate the 18% VAT with the 2.5% SSCL resulting in the new VAT rate on financial services at 20.5%.

However there is no additional tax burden due to this, other than the slight impact on income tax calculation of the institution.

Film industry and strategic businesses

The Bill introduces a targeted relief for the film exhibition sector by permitting the Entertainment Tax charged by local authorities under the Entertainment Tax Ordinance (Chapter 267) to be deducted when determining the value of supply of a film exhibition service for VAT purposes.

This addresses a longstanding concern about double taxation on cinema ticket revenue, where Entertainment Tax and VAT have effectively been levied on the same underlying transaction value.

Separately, the Bill introduces a new VAT exempt category under Part III of the First Schedule for goods or services supplied to any business identified and approved as a Business of Strategic Importance under section 52 of the Colombo Port City Economic Commission Act, No. 11 of 2021.

A practically significant but less-discussed provision concerns wholesalers and retailers who become newly registered for VAT on or after July 1, 2026. Under the new subsection 22(15), such persons will be entitled to claim a deemed input tax credit on unsold stocks held as at the date of registration, calculated at the VAT rate applicable at the time those goods were acquired.

This is a commercially sensible concession, recognising that goods in a trader’s warehouse at the point of registration will have already borne VAT at the procurement stage, and denying credit would amount to a tax on tax. However, the relief is conditional, the registered person must maintain records of unsold stocks in the form prescribed by the Commissioner-General and submit those records together with the first VAT return. Businesses entering the VAT net from July 1, 2026 due to the reduced threshold should, therefore, take a careful stock inventory as at their registration date and ensure their record keeping meets the prescribed standard, failing which the deemed input entitlement may be lost entirely.

A new Section 64B will require every registered person to use secured point-of-sale machines for all transactions and invoice issuance within three months of the prescribed date. The stated objective is real-time capture of transaction data to ensure proper accounting of turnover and VAT collection. This is a welcome compliance-enhancing measure, though smaller registered businesses may find the capital outlay and transition period challenging.

Strengthened penalties and criminal proceedings

The Bill significantly upgrades the penal architecture of the VAT Act. For periods from October 1, 2025, the maximum fine for VAT offences , including fraudulent refund claims, rises sharply to Rs. 1 million, compared with the earlier ceiling of Rs. 25,000. A restructured Section 68 now expressly provides that the Attorney-General or a delegate shall prosecute VAT offences, with criminal proceedings permitted to run concurrently alongside civil penalty proceedings.

The VAT (Amendment) Bill 2026 reflects a revenue authority determined to modernise and broaden the tax base. The digital services regime addresses a long-standing gap in Sri Lanka’s VAT architecture, though there is much room for improvement in relation to this aspect.

The threshold reduction will expand the registered taxpayer base considerably. Businesses should begin assessing their compliance positions immediately, July 2026 is closer than it appears.

The writer is an Attorney-at-Law (LLB), FCMA (UK), CGMA, FCMA, who was awarded Tax Practice Leader of the Year 2024 (ASPAC) by the International Tax Review and was also a top-four finalist for Tax Litigation and Disputes Practice Leader of the Year (ASPAC).