Value Added Tax (Amendment) Act No. 14 of 2026 — Key Changes You Need to Know
Source: Inland Revenue Department Notice SEC/PN/VAT/2026-03, dated 3 July 2026
The Value Added Tax (Amendment) Act No. 14 of 2026 was certified on 30 June 2026, introducing a wide range of changes to the VAT Act No. 14 of 2002. Below is a summary of the key amendments and what they mean for your business.
1. Registration Thresholds Remain Unchanged
The previously proposed reduction in the VAT registration threshold has been abandoned. The existing thresholds continue to apply:
- LKR 15 million in any taxable period (quarterly); or
- LKR 60 million over the preceding twelve-month period (annual)
Action point: No change needed to your current registration status assessment.
2. New VAT on Digital Services from Non-Residents (Effective 1 July 2026)
Non-resident persons supplying services to Sri Lankan customers through electronic platforms are now within the VAT net.
- Registration trigger: LKR 60 million (or foreign currency equivalent) over any 12-month period, or LKR 15 million in any quarter from 1 July 2026 onward.
- Registration must be done electronically under Section 25L(1) within three months of becoming liable.
- Important relief: Under Section 25N, VAT will not be charged if the Sri Lankan recipient is already VAT-registered — meaning B2B transactions with registered local businesses are excluded.
- Further operational guidelines on charging, payment, and compliance are expected from the Commissioner-General.
Action point: If your business procures digital services from foreign suppliers (software, SaaS, cloud, digital advertising, etc.), confirm your own VAT-registered status is on record with the supplier to avoid being charged VAT unnecessarily.
3. New Exemptions Effective 1 July 2026
Several digital and strategic-sector exemptions have been introduced:
- Supplies to businesses approved as “Businesses of Strategic Importance” under the Colombo Port City Economic Commission Act.
- Cross-border digital educational services (online courses, virtual classrooms, LMS platforms).
- Cross-border digital healthcare services (telemedicine, online consultations, AI-assisted diagnostics).
- Services to diplomatic missions/organizations under applicable agreements with the Government.
4. Zero-Rating for Garment Buying Offices (Effective 1 October 2025)
Services provided by garment buying offices registered under the Industrial Promotion Act to overseas buyers are now zero-rated, provided:
- The customer is located outside Sri Lanka, and
- Payment is received in foreign currency.
Action point: Garment sector clients should review invoicing to apply zero-rating and ensure supporting documentation (foreign currency receipts) is retained.
5. Financial Services VAT Rate Increased to 20.5%
Effective for taxable periods commencing on or after 1 July 2026, the VAT rate on financial services rises to 20.5%. As a corresponding relief, financial services taxed at this rate are exempt from SSCL.
Action point: Financial institutions should update billing systems and confirm SSCL exemption is correctly applied to avoid double taxation.
6. Film Exhibition Services — Entertainment Tax Deduction (Effective 1 July 2026)
Entertainment tax charged by local authorities on cinema ticket sales may now be deducted when calculating the VAT-taxable value, in addition to existing deductions under Section 5(8).
7. Input Tax Disallowance on Deferred-VAT Project Imports (Effective 1 July 2026)
Where VAT on imported plant, machinery, equipment, or vehicles was deferred on the assurance of re-export, and re-export does not occur within one month of project completion, any VAT subsequently paid will not be allowed as deductible input tax.
Action point: Project-based importers should tighten tracking of re-export deadlines to preserve input tax credits.
8. Mandatory Secured POS Machines
All VAT-registered persons must, within three months of a date to be prescribed, use secured Point-of-Sale (POS) machines for transactions, invoicing, and record-keeping. Technical specifications will follow from the Commissioner-General.
Action point: Budget for POS system upgrades and watch for the prescribed compliance date.
9. Sharply Increased Penalties
Penalties for tax fraud, evasion, and fraudulent refund claims (Section 66) and for return/compliance offences (Section 67) have increased significantly for offences committed on or after 1 October 2025:
| Before 1 Oct 2025 | On/after 1 Oct 2025 | |
|---|---|---|
| Fraud/evasion fine | 2x tax evaded + up to LKR 25,000 | 2x tax evaded/refund claimed + up to LKR 1,000,000 |
| Returns/compliance fine | Up to LKR 25,000 | Up to LKR 1,000,000 |
| Imprisonment | Up to 6 months | Up to 6 months |
New offences added under Section 67 include fraudulently obtaining refunds and failing to furnish valid tax invoices or customs declarations.
Action point: Ensure invoicing and documentation practices are airtight — the cost of non-compliance has risen 40-fold.
10. Public Disclosure of VAT Registration Data
The Commissioner-General will now publish the name, address, TIN, and registration status of every VAT-registered person, overriding prior confidentiality provisions in Section 73(1).
11. Other Administrative Changes
- VAT schedules can now be submitted from the start of the relevant taxable period (via CSV upload, direct e-Service Portal entry, or API integration with your ERP through RAMIS).
- Tsunami relief project tax defaults will be written off where the Government undertook the VAT payment.
- Criminal proceedings under the VAT Act will be investigated by the Commissioner-General and prosecuted by (or under authority of) the Attorney-General, effective 1 July 2026.
Recommended Next Steps
- Review contracts with foreign digital service providers and confirm VAT-registration status is communicated to them.
- Update ERP/invoicing systems for the financial services rate change and SSCL exemption.
- Assess RAMIS integration options for schedule submission efficiency.
- Tighten internal controls around tax invoices and re-export documentation given the steep rise in penalties.
- Monitor IRD announcements for the POS machine prescribed date and technical specifications.
This alert is a general summary of the notice issued by the Inland Revenue Department and does not constitute tax advice. Please contact our office to discuss how these changes specifically affect your business.
