Sri Lanka’s New VAT Rules could have negative outcome on Tourism,Telecom, IT Sectors

“A ‘Tax on Knowledge’ Impacting Youth”

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

This means global giants  like Booking.com and Agoda.com will be required to charge VAT to Sri  Lankan users

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 EconomicDevelopment 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.