The government will introduce an 18% Value Added Tax (VAT) on digital services provided by non-resident companies to local consumers, effective October 1, 2025.

Accordingly, foreign service providers are required to register for VAT in Sri Lanka and collect the tax on their services.

The VAT law was updated through the VAT (Amendment) Act No. 4 of 2025, which implemented VAT on digital services.

The Inland Revenue Department has also published detailed guidelines through the Gazette Notification 2443/30, on this new digital tax.

Accordingly, the new VAT rules define terms such as “electronic platform” and “non-resident person,” and impose obligations on foreign digital service providers to charge and remit VAT on various services, including streaming, online gaming, and software as a service (SaaS).

Electronic marketplace facilitators may also be liable for VAT reporting on third-party sales.

According to the guidelines, the non-resident must first obtain a Tax Identification Number (TIN) before proceeding to acquire VAT registration. VAT registration is required only if the value of supply in the last 12 months exceeds Rs. 60 million per annum or Rs. 15 million in the last three months.

Non-compliance with registration requirements could also lead to penalties from the Inland Revenue Department, according to the new regulations.

With the enforcement of new regulations following services are likely to become liable to VAT collections:

• E-commerce Services
• Cloud Computing
• Software as a service (SaaS)
• Cybersecurity Services
• Digital Marketing & Advertising
• IT support & Managed Services
• Streaming Services
• Fin Tech
• Subscription & Membership Website
• E-commerce Platforms
• Social Media Platforms
• On Demand Service Platforms
• Content Sharing Platforms
• Cloud Collaboration Platforms
• Market Place Platforms
• Gaming Platforms
• Blockchain & NFT Platforms
• Apps for hotel bookings and ticket reservations

The World Bank has released its annual update on country income classifications, reaffirming Sri Lanka’s status as a lower-middle-income economy for the fiscal year 2026.

The classification is based on Gross National Income (GNI) per capita for the previous year, calculated using the Atlas method, which smooths exchange rate fluctuations to provide a more stable measure of economic capacity.

Sri Lanka’s retention in the lower-middle-income bracket reflects a complex economic recovery path following recent fiscal challenges, inflationary pressures, and structural reforms.

While the country has shown signs of stabilization, its GNI per capita remains below the threshold required to move into the upper-middle-income category.

Understanding the World Bank’s Classification System:

Each year on July 1, the World Bank classifies economies into four income groups:

– Low-income: GNI per capita of $1,135 or less  

– Lower-middle-income: $1,136 to $4,465  

– Upper-middle-income: $4,466 to $13,845  

– High-income: $13,846 or more

These thresholds are adjusted annually for inflation using the Special Drawing Rights (SDR) deflator.

Sri Lanka’s export sector demonstrated remarkable resilience and steady progress during the first five months of 2025, with total exports reaching US$6,933.35 million, marking a robust 7.14% growth compared to the same period in 2024. 

According to the Export Development Board (EDB), total exports, including both merchandise and services, reached US$1,386.66 million in May 2025. This shows an impressive year-on-year growth of 6.35% over May 2024, reflecting the resilience of Sri Lanka’s export sector and the positive impact of strategic efforts to diversify markets and enhance competitiveness.

In May 2025 alone, merchandise exports grew by 1.70 % year-on-year, reaching US$1,028.52 million, according to provisional data of Sri Lanka Customs, including the estimates for Gems & Jewellery and Petroleum Products. For the period January to May 2025, merchandise exports totalled US$5,344.23 million, reflecting a 5.46% increase compared to the same period in 2024. 

Meanwhile, services exports have emerged as a key driver of overall export growth. In May 2025, earnings from services exports were estimated to be US$358.14 million. Over the first five months of the year, services exports are estimated to have increased by 13.20%, totalling US$1,589.12 million. This trend highlights the rising importance of Sri Lanka’s knowledge-based economy and its growing contribution to national export earnings.

The services export sector, comprising ICT/BPM, Construction, Financial services, and Transport & Logistics, continues to diversify Sri Lanka’s export portfolio and create high-value employment opportunities across the Island.