New VAT hits software and digital service providers for local customers

Sri Lanka’s VAT rate is poised to reach a record high of 18 per cent next year hitting VAT exempted software and digital service providers which are reaping benefits from the country’s steady rise of digitalisation, IT industry sources said.

Internet businesses that have boomed amid the coronavirus pandemic will be badly affected by the government’s move to raise tax revenue.

The government’s move to impose VAT on software and digital service providers catering to needs of domestic consumers is expected to provide a major impetus to revenue next year.

The estimated revenue from increasing the VAT to 18 per cent from 15 per cent will be in the region of Rs. 227 billion while an additional sum of Rs. 40 billion is to be collected by bringing the VAT threshold to Rs. 60 million from Rs. 80 million, Finance Ministry’s revenue estimates shows.

Representatives of domestic and international software and digital service providers such as PickMe, Uber, AIC (representing Meta, Google, X, Booking.com, Amazon, etc) and Daraz expressed their concerns on the new VAT hike and it’s implications on their businesses.

These software and digital service providers were called before the Committee on Public Finance held recently chaired by Dr. Harsha de Silva MP.

It has been revealed that all those software and digital service providers are exempted from the recovery of VAT at present.

But all such tax exemptions will be withdrawn with the Value Added Tax (Amendment) Bill coming into effect from January 1 2024.

This will not be applicable for exportoriented software and digital service providers and they are in the group of zero VAT, he said.

Benefits of the 18 per cent tax on IT service providers amounting to around Rs.11.5 billion will be passed on the sector by way of research on AI, and all other technological research.

The Asia Internet Coalition (AIC), which represents key players in the Internet industry and promotes the understanding and resolution of Internet policy issues in the Asia-Pacific region, disclosed that the international standard for adopting VAT on software and digital service providers is based on the authority of the consumer, not the jurisdiction under which a particular business operates.