Sri Lanka VAT Guide 2026

Overview — VAT in Sri Lanka

Value Added Tax (VAT) was introduced in Sri Lanka in 1998 and is governed by the VAT Act No. 14 of 2002. The Inland Revenue Department (IRD) administers VAT. The standard rate was increased from 15% to 18% in 2024 as part of broader fiscal reforms. VAT is levied at each stage of the supply chain, with businesses entitled to input VAT credits on taxable purchases. The final consumer bears the full VAT cost. VAT-inclusive pricing is standard for B2C transactions.

Standard Rate — 18%

The standard VAT rate is 18%, effective since 2024 (increased from the previous 15% rate). It applies to most goods and services supplied in Sri Lanka that are not zero-rated, exempt, or otherwise excluded. VAT is charged on the taxable value of the supply (generally the selling price exclusive of VAT). Input VAT credits can be claimed for VAT paid on business purchases, imports, and expenses directly attributable to taxable supplies.

Zero-Rated Supplies (0%)

The following supplies are zero-rated (0%), meaning no VAT is charged but the supplier can still recover input VAT:

• Exports of goods and services outside Sri Lanka
• Supplies to approved Export Processing Zones and Board of Investment (BOI) enterprises
• International transport services (air, sea, and related services)
• Supplies of ships and aircraft for international routes
• Certain services provided to foreign missions and international organisations

Exempt Supplies

The following supplies are exempt from VAT, meaning no VAT is charged and input VAT on related purchases cannot be recovered:

• Basic food items: Unprocessed agricultural products, rice, fresh vegetables, fruits, fish, meat, eggs, milk
• Healthcare services: Medical, dental, and hospital services licensed under the Medical Ordinance
• Education services: Registered schools, universities, and vocational training institutions
• Financial services: Banking, insurance, and related financial services (interest, loans, insurance premiums)
• Residential property: Sale and rental of residential accommodation
• Religious and charitable services: Services provided by recognised religious and charitable institutions
• Postal services: Basic postal services provided by Sri Lanka Post

VAT Registration Threshold — LKR 120 Million

Businesses with annual taxable turnover exceeding LKR 120 million must register for VAT. Voluntary registration is available for businesses below this threshold. The threshold applies to taxable supplies made within Sri Lanka. Once the threshold is exceeded, registration becomes mandatory from the first day of the following month. Non-resident businesses providing taxable supplies in Sri Lanka generally must register regardless of turnover if they have a fixed establishment in the country.

VAT Returns — Monthly and Quarterly Filing

VAT returns in Sri Lanka are filed electronically through the e-VAT system. Filing periods depend on the taxpayer's turnover:

• Monthly: Taxpayers with annual turnover exceeding LKR 500 million must file and pay VAT on a monthly basis
• Quarterly: Taxpayers with turnover between LKR 120 million and LKR 500 million may file quarterly

Returns and payments are due by the 20th day of the month following the end of the filing period. Late filing incurs penalties of 1.5% per month on the outstanding amount.

e-VAT Electronic System

Sri Lanka's e-VAT system allows taxpayers to register, file returns, make payments, and communicate with the IRD online. The platform is accessible through the IRD website after obtaining a Taxpayer Identification Number (TIN). Features include:

• Online VAT return submission (Form VAT 1 for monthly/quarterly returns)
• Electronic payment of VAT through licensed banks
• Claim for input VAT credits and refunds
• View filing history and payment status

All registered VAT taxpayers must use the e-VAT system; paper filing is no longer accepted for registered taxpayers.

FAQs

When did the VAT rate increase from 15% to 18%?

The VAT rate was increased from 15% to 18% effective 1 January 2024, as part of the government's fiscal consolidation measures under the IMF program.

Can I claim a VAT refund on business purchases?

Yes, registered VAT taxpayers can claim input VAT credits on taxable business purchases. If input VAT exceeds output VAT in a filing period, the excess may be carried forward or refunded under certain conditions.

Is VAT applicable on digital services?

Yes, Sri Lanka imposes VAT on digital services provided by foreign platforms to Sri Lankan consumers under the Simplified VAT regime for cross-border digital services.

Disclaimer

This guide provides general information about Sri Lankan VAT for the 2026 tax year. Tax laws and rates may change. Always consult with a qualified tax advisor or the Inland Revenue Department directly for advice specific to your business. InvestmentKit does not provide tax advice.