Worldwide VAT, GST and Sales Tax Guide
that the transaction has happened at less than the open market value (resulting in the avoidance of paying tax).
Similarly, under SSCL, the Assistant Commissioner shall, having regard to the circumstances of the transaction and the time period of the sale of such article or the provision of such service, determine the open market value of such article or service on which the levy shall be charged where it is of the opinion that the transaction has happened at less than the open market value (resulting in the avoidance of paying tax).
C. Who is liable
A “registered person” in terms of the Sri Lanka VAT Act is a taxable person and liable for VAT on the taxable supply of goods and services. This includes any “company” or “body of persons” that makes taxable supplies of goods and/or services in the course of carrying out a taxable activity in Sri Lanka and who is registered for VAT.
VAT registration is required if the taxable supplies exceed LKR15 million per quarter or LKR60 million per annum.
Further, where any person has proved to the satisfaction of the Commissioner General of the Inland Revenue Department (CGIR), that such person has commenced any business or any project in Sri Lanka and undertakes to make taxable supplies in respect of such business or project within a period of 30 months from commencement of such operation, then the CGIR may register such person, i.e., Section 22 (7). Furthermore, if the CGIR, having regard to the nature of the activity, is of the opinion that a person is required to register, such person must register for VAT.
For SSCL, a person carrying out a business of manufacturing, provision of services or wholesale and retail who exceeds the relevant threshold and persons importing goods to Sri Lanka, are liable for SSCL. Any other person who has turnover exceeding LKR15 million per quarter (or expects the turnover to so exceed) is required to register within 15 days.
Exemption from registration. The VAT law in Sri Lanka does not contain any provision for exemption from registration.
Voluntary registration and small businesses. If a taxable person has commenced making taxable supplies irrespective of whether the value of taxable supplies has reached the relevant threshold, any such taxable person who wishes to register for VAT can apply for registration voluntarily. The application is to be reviewed by the CGIR and it may be refused.
Group registration. Group VAT registration is not allowed in Sri Lanka.
Fixed establishment. In Sri Lanka, there is no legal definition of a fixed establishment for VAT purposes.
Non-established businesses. Only taxable persons carrying out taxable activities in Sri Lanka are liable to register for VAT upon satisfying the relevant threshold. Businesses that have no presence (i.e., no premises, employees or agents) in Sri Lanka are not obliged to register for VAT to carry out taxable activities involving the supply of goods and/or services to persons in Sri Lanka from outside Sri Lanka.
However, if such a taxable person carries on a taxable activity and supplies goods and/or services in Sri Lanka through an agent in Sri Lanka who is acting on behalf of the non-established business, then such agent will be liable to VAT on such supply made on behalf of the non-established business. In Sri Lanka, a taxable activity can be carried on by a non-established business in more ways than via an agent (e.g., via a legal presence/employees). Therefore, a non-established business would not be required to register for VAT unless it carries on a taxable activity in Sri Lanka (directly or via an agent).
Tax representatives. Tax representatives are not required in Sri Lanka.
Reverse charge. The reverse charge does not apply in Sri Lanka. Where a non-established business (i.e., a nonresident person) carries out a business in Sri Lanka that would give rise to a taxable activity, such persons will be required to register for VAT if the relevant threshold has been exceeded. Upon registration, the nonresident person carrying out the taxable activity in Sri Lanka will be required to charge VAT on the supplies made and account for the same.
Domestic reverse charge. There are no domestic reverse charges in Sri Lanka.
Digital economy. There are no special VAT rules applicable to the digital economy, electronically supplied services or e-commerce in Sri Lanka. Hence, general VAT rules will apply. If the digital services are provided during the course of carrying out a taxable activity in Sri Lanka, an exposure will arise (subject to any exemptions/zero ratings that may be applicable), provided the relevant threshold is satisfied.
Nonresident providers of electronically supplied services for business-to-consumer (B2C) and business-to-business (B2B) supplies, would be required to register and account for VAT in Sri Lanka once its supplies exceed the registration threshold.
However, based on the recent budget proposal, it has been proposed to introduce VAT on digital services at 18% from 1 April 2025.
Online marketplaces and platforms. No special rules exist for online marketplaces and platforms in Sri Lanka.
Registration procedures. VAT. A person can obtain a tax identification number (TIN) registration by submitting the relevant documents to the Department of Inland Revenue (DIR) in person or online. This would take approximately two weeks if all the documents are in place.
The relevant documents required to be submitted for registration may vary depending on the person applying for it (e.g., an individual, a foreign company, a resident company). Generally, a resident company can obtain a TIN if the following is submitted with the relevant application form:
• Certificate of incorporation (Form 2A)
• Application for registration of a company (Form 1) (Certified copy issued by the registrar of companies)
• Articles of association with signatures of the shareholders
• Photocopies of the National Identity Card of the directors
Once the taxable person obtains the TIN from the DIR, the person can complete the VAT registration form and submit it to the DIR. This form can be obtained in person (from the Tax Registration Unit) and online (e-services). This can be submitted in person to the Taxpayer’s Service Unit (TPSU) of the DIR, in person or sent by post. It can also be submitted online. The following documents must be submitted with the application:
• TIN certification
• Certificate of business registration
In case of a limited liability company, in addition to the above, the following will be required:
• Articles of association
• List of directors
• Certificate of incorporation
• Copy of the National Identity Cards of the directors of the business
• Particulars of sales to prove the turnover
• Monthly bank statements to verify cash receipts.
A VAT registration may take three to four weeks if all the relevant documents are in place. Upon registration, a VAT Registration Certificate will be issued by the DIR.
SSCL. For SSCL, the application form can be sent to the relevant unit at the tax authority by hand delivery, registered post or through email. However, if the request is made by email, the original application must be sent to the relevant unit.
Deregistration. A taxable person may make an application to have its registration canceled at any time after the lapse of a period of 12 months following the date of registration, where such taxable person has ceased to carry on or carry out a taxable activity or the total value of its supplies during any taxable period within such period does not exceed the VAT registration threshold.
Changes to VAT registration details. Every taxable person must notify the CGIR in writing or by electronic means no later than 14 days after the occurrence of the following changes:
• Name, address and place at which any taxable activity was carried on or carried out by such a person
• Nature of the taxable activity that was carried on or carried out by such person
• Person authorized to sign returns and other documents
• Ownership of the taxable activity
Every taxable person who fails to notify the CGIR of the above changes shall be guilty of an offense under the VAT Act and shall be liable on conviction after summary trial before a magistrate to a fine not exceeding LKR25,000, or to imprisonment of either description for a term not exceeding six months or both such fine and imprisonment.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero-rate.
The VAT rates are:
• Standard rate: 18%
• Zero-rate: 0%
The standard rate of VAT applies to all supplies of goods and services unless a specific measure provides for the zero-rate or an exemption.
The standard rate of VAT increased from 15% to 18% with effect from 1 January 2024. Previously when the standard rate was 15%, there was a separate special rate at 18% for financial services. As the increased standard rate is now the same as the previous special rate, the special rate is no longer effective.
SSCL is charged at 2.5% on the liable turnover. The liable turnover in respect of each of the taxable persons shall be as follows:
• Importer: 100% of the import value
• Manufacturer: 85% of the turnover (which is the sum receivable from the manufacture and sale of any article in Sri Lanka)
• Registered distributor: 25% of the turnover (which is the sum receivable from the wholesale or retail sale of any article in Sri Lanka)
• Wholesale and retail (other than by registered distributors): 50% of the turnover (which is the sum receivable from the wholesale of any article in Sri Lanka)
• Service provider:
– Supply of financial services: 100% of the value addition attributable to financial services
– Real estate and improvements: 100% of the turnover (which is sale value – market value of the bare land to date of sale)
– Services other than the above: 100% of the turnover (which is the sum receivable from the provision of service in Sri Lanka)
import invoice relating to such article specifying the amount so collected. This amount is deemed to have been paid to the CGIR on the day on which such amount was so collected by the Director General of Customs.
Manufactured articles. The levy is chargeable at the time the sum is receivable whether received or not, in that quarter, of any article manufactured and sold in Sri Lanka.
Wholesale and retail sale. The levy is chargeable at the time the sum is receivable, whether received or not, from the wholesale or retail sale of any article in Sri Lanka. Services. The levy is chargeable at the time the sum is receivable, whether received or not, from the provision of any service in Sri Lanka.
F. Recovery of VAT by taxable persons
A taxable person may recover input tax, which is the VAT paid by the taxable person on the local purchase of goods and services that were used by it in its trade or business, and any VAT paid on the imports used in such business.
A taxable person generally recovers input tax by deducting it from output tax (the deduction is restricted to 100% of the output tax), which is the VAT charged on supplies made. For further details on the refund procedure, as well as what happens if a taxable person has excess input tax, see the Refunds subsection below.
The time limit for a taxable person to reclaim input tax in Sri Lanka is 12 months from the date of the tax invoice. The input tax should be declared and claimed in the VAT return on or before the expiry of 12 months from the date of such tax invoice. For any imports, the input tax should be declared and claimed before the expiry of 24 months from the date of the customs declaration. If the taxable person declares the input tax in the VAT return within the said period, it can be carried forward in the return until it can be set off against the output tax.
A valid tax invoice or customs goods declaration should generally accompany a claim for input tax.
Nondeductible input tax. Input tax credit for VAT cannot be claimed on purchases of goods and services that are not attributable to taxable supplies made by the taxable person. In addition, input tax may not be claimed in respect of certain items of business expenditure.
Under SSCL, there is no mechanism to recover input tax incurred.
Examples of items for which input tax is nondeductible
• Private expenditure where such goods and services are not included in the value of taxable supplies
• Expenditure directly connected to exempt supplies
• Input tax not supported by a valid tax invoice
Examples of items for which input tax is deductible (if related to taxable business use)
• Professional services
• Business telephones
• Advertising
• Conferences and seminars
Partial exemption. If a taxable person is engaged in making taxable and exempt supplies (i.e., mixed supplies), only the input tax credit that is relevant to the taxable supplies (i.e., the supplies that are liable to VAT) will be allowed as an input tax deduction against the output tax.
In such cases, the input tax must be apportioned between the amount attributable to taxable supplies and the amount attributable to exempt supplies. Input tax relating to the taxable supplies
A taxable person is not entitled to issue a tax invoice to an unregistered person. The invoice to an unregistered person should consist of the total consideration of such supply, including the tax charged.
Credit notes. A credit note must be used to reduce the VAT charged on a supply made to a taxable person, i.e., if VAT has been overcharged in the original invoice. A credit note must be crossreferenced to the original tax invoice, must detail the reasons for the adjustment, should be in the form specified by the CGIR and must contain a serial number. However, the adjustment can be made only if the tax credit note has been issued within six months after the issue of the original tax invoice.
Electronic invoicing. Electronic invoicing is allowed in Sri Lanka, but not mandatory.
Scope of electronic invoicing. For B2B, B2C and business-to-government (B2G) supplies, electronic invoicing is allowed but not mandatory in Sri Lanka. There is no threshold beyond which taxable persons are required to adopt electronic invoicing in Sri Lanka. The requirements related to electronic invoicing are the same as those for paper invoicing.
However, the DIR may refuse to accept digitally signed invoices/electronic invoices. Hence, the issuance of paper invoices is recommended if any invoices are requested for inspection in the case of a tax audit by the DIR.
Simplified VAT invoices. Supplies to a registered identified purchaser (RIP) can be made on a suspended tax invoice showing the VAT component as “suspended VAT.” Suspended VAT means no VAT is charged on the supply. Such suspended invoices should be issued without any delay. Before making supplies under suspended terms to a taxable person, a registered identified supplier (RIS) is required to make sure the person is a RIP. The lists of which are RIPs/RISs have been published in the official web site of the DIR. For further details, see the subsection Special schemes subsection.
Self-billing. Self-billing is not allowed in Sri Lanka.
Proof of exports. Export invoices should be supported by evidence to the effect that goods have in fact left Sri Lanka. In the event any queries are raised, export custom declaration, bill of lading/airway bill, boat note, and other relevant documents should be furnished to prove the export of goods and to be eligible for zero rating.
Foreign currency invoices. If a tax invoice is issued in a foreign currency, the value for VAT should be computed in the domestic currency, which is the Sri Lankan rupees (LKR), based on the official bank (exchange) rate applicable on the date of the transaction.
Supplies to nontaxable persons. Where a taxable person makes supplies to any person who is not registered for VAT (i.e., a nontaxable person), a commercial invoice is required to be issued to such persons. Such invoices should not show the VAT amount charged separately (i.e., these invoices will only show the total amount charged, including VAT).
Records. In Sri Lanka, examples of what records must be held for VAT purposes include records in respect of goods and services made as part of any taxable supply, deemed a taxable supply, excluded supply or exempt supply, and a suspended supply or deemed a suspended supply, based on the tax invoice, suspended invoice or commercial invoice issued to another taxable person or partnership in a serial order. All records should be kept and maintained by every taxable person up to date with adequate information on the input and output tax to ascertain the liability of the tax payable.
In Sri Lanka, VAT books and records can be held outside of the country. There are no specific rules on the location of storage of such records. However, if the records are in relation to any
• Issue, allotment, transfer of ownership of any equity security or a participatory security
• Issue, underwriting, subunderwriting or subscribing of any equity security, debt security or participatory security
• Provision of any loan, advance or credit
• Provision of the facility of installment credit finance in a hire purchase conditional sale or credit sale agreement for which facility a separate charge is made and disclosed to the person to whom the supply is made
• Provision of goods under any hire purchase agreement or conditional sale or hire purchase agreement while being used in Sri Lanka for a period not less than 12 months as at the date of such agreement
• Provision of leasing facilities under any finance lease agreement
• Provision of leasing facilities under any operating lease agreement in respect of any installment for any period prior to on 1 November 2016, on any asset other than any land or building, if such agreement is entered into on or after 25 October 2014 and not being an agreement entered into prior to 25 October 2014
The taxable period of every registered specified institution or other person in this regard must be 12 months. Every registered specified institution or other person must furnish a return within six months immediately succeeding the end of that taxable period. Further, every registered person is required to furnish an interim estimate every six months.
SSCL of 2.5% will apply on 100% of the value addition attributable to financial services (to be determined in accordance with the attribution method in Chapter IIIA of the VAT Act).
Annual returns. Annual returns are not required in Sri Lanka.
Supplementary filings. No supplementary filings are required in Sri Lanka.
Correcting errors in previous returns. Amended tax returns can be filed by taxable persons with an explanatory letter requesting the change. The amended schedules are first required to be submitted online. Subsequently, with the acknowledgment of the online submission, the amended tax returns can be submitted in person to the DIR.
Digital tax administration. There are no transactional reporting requirements in Sri Lanka.
J. Penalties
Penalties for late registration. If a taxable person fails to register or is late to register for VAT, it is subject to a summary trial before magistrate and on conviction will be liable to the following:
• A fine not exceeding LKR25,000
• Imprisonment for a term not exceeding six months Or
• Both fine and imprisonment
Penalties for late payment and filings. If a taxable person files its VAT return late, the CGIR may impose the following:
• A penalty in a sum not exceeding LKR50,000
• Require such person to pay the penalty
• Require such person to furnish the return required of it within a specified period
Except where the CGIR imposes a penalty as given above, any taxable person shall be liable on conviction after a summary trial before magistrate to the following:
• A fine not exceeding LKR50,000
• Imprisonment for a term not exceeding six months Or
• Both fine and imprisonment