Sri Lanka’s new VAT rules could have negative outcome on tourism, telecom, IT sectors

*Amendments raise the VAT on financial services from 18% to 20.5%

*Software subscriptions, cloud services, and internet packages expected to become more expensive

*Taxes may drive up cost of smartphones and digital devices

By Panduka Keerthinanda

The government’s latest move to expand the Value Added Tax (VAT) net to the digital economy, effective July 1, has triggered alarm bells across multiple sectors. While the Ministry of Financial Planning and Economic Development frames the Gazette notification as a necessary step to capture revenue from the evolving digital economy, industry experts warn of a cascading negative impact on telecommunications and the nation’s youth. This may also negatively impact the entertainment industry and tourism (OTAs).

The new amendments, published last week, impose VAT on services provided through electronic platforms. This means global giants like Booking.com and Agoda.com will be required to charge VAT to Sri Lankan users. For the already struggling tourism marketing industry, this is a major blow.

“Sri Lanka is competing with regional destinations based on price sensitivity. Adding a tax to hotel bookings via these platforms will make us more expensive, potentially reducing foreign arrivals and local travel,” an industry source noted.

Digital Age Tax: The Price of Connectivity

Perhaps the most far-reaching consequences, however, are anticipated in the digital telecommunications and Information Technology (IT) sectors. The amendments raise the VAT on financial services from 18% to 20.5% and, more critically, apply new layers of taxation to digital transactions.

Stakeholders predict a ripple effect that will hit ordinary citizens and businesses hard:

· Software and Internet Costs to Rise: With VAT applied to cross-border digital services, popular software subscriptions, cloud services, and even internet data packages are expected to increase in price.

· Mobile Phone Price Hike: The new tax structure is expected to drive up the cost of mobile phones and devices, widening the digital accessibility gap.

· Outsourcing Under Threat: Sri Lanka’s burgeoning IT outsourcing (BPO) industry, which relies on affordable global digital tools, will see operational costs spike. This could make Sri Lanka less competitive compared to India, Vietnam, or the Philippines.

· Exodus of Platforms: There are growing fears that some international digital platforms may simply withdraw from the Sri Lankan market rather than navigate complex local VAT registration and compliance rules, limiting consumer choice.

Beyond the business bottom line, economists and education advocates are concerned about the social impact. With internet prices and device costs rising, the amendment is being labeled as a potential “tax on knowledge.”

“Younger generations depend heavily on digital platforms for education, freelancing, and employment opportunities. Making access more expensive will only deepen the knowledge divide,” said an IT industry representative.

The Gazette also revises the VAT registration threshold under Section 10 of the Principal Act. Going forward, any person whose total value of taxable supplies of goods or services exceeds Rs. 9 million within a taxable period will be required to register for VAT.

While the government defends the move as essential for fiscal stability, particularly raising the VAT on financial services to 20.5%. Experts argue that without adequate transition measures, Sri Lanka risks undermining the digital economy it desperately needs for recovery, thereby triggering a slowdown.