The Bill to amend Sri Lanka’s Value Added Tax Act, released on April 29, sets out eleven changes that will reshape compliance obligations across digital services, financial services and small businesses, according to a tax update issued by KPMG Sri Lanka and a government document reviewed by EconomyNext.

Among the most consequential measures is a sharp cut in the VAT registration threshold, from annual turnover of Rs. 60 million to Rs. 36 million effective July 1, 2026. The change pulls a substantial layer of mid-sized businesses into the tax net for the first time.

The Bill also imposes VAT on digital services supplied by non-resident companies to consumers in Sri Lanka — the long-delayed digital-services measure that the Finance Ministry gazetted separately for July 1 — and raises the rate on financial services from 18 percent to 20.5 percent on the same date. Banks and other financial institutions will absorb the increase or pass it through to customers. Both moves were proposed in the last Budget speech but delayed due to the impacts of the Middle Eastern escalation, EconomyNext reported.

Enforcement is tightened: maximum fines for VAT offences rise to Rs. 1 million with possible imprisonment of up to six months, while all VAT-registered businesses will be required to adopt secured point-of-sale systems approved by the Inland Revenue Department for real-time transaction reporting. The Bill further provides for public disclosure of registered taxpayers and revised input-tax rules.

Exemptions cover goods or services for businesses identified as having Strategic Importance under the Colombo Port City Economic Commission Act, alongside specific non-resident electronic services such as online education (courses, webinars, digital platforms) and healthcare services (telemedicine, digital prescriptions, AI diagnostics).

The government must introduce new taxes to reach the 2026 fiscal targets it committed to under the IMF programme, EconomyNext said, after a record vehicle-import-driven tax revenue last year. The package follows the third postponement of the digital-services VAT and represents the most comprehensive update to the VAT Act since the rate was raised to 18 percent in 2024. The Bill becomes legally enforceable after Parliament completes the constitutional process.

Sources: Newswire, EconomyNext.