Sri Lanka is preparing to roll out an 18% value-added tax (VAT) on non-resident digital services, targeting platforms like PayPal, Stripe, Netflix and Canva.
Set to take effect in October 2025, but then postponed to April 2026, the move is, authorities say, about bringing foreign providers under the same tax obligations as local firms. But for those who rely on these platforms, the change feels more like a blindside than a reform.
Despite its wide scope, the policy has arrived with almost no official guidance. Most freelancers, digital entrepreneurs and small tech businesses learned about it through social media and WhatsApp groups.
The tax is expected to affect a range of services – software subscriptions, cloud tools, design platforms and streaming services – that are integral to Sri Lanka’s growing freelance and start-up community.
Freelancers say they are often denied access to credit cards or business loans
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But this segment also remains largely unsupported. Freelancers say that, despite being tax-compliant, they are often denied access to credit cards or business loans. Now they are expected to navigate VAT registration, returns and compliance requirements with no guidance.
Sri Lanka’s digital economy, currently estimated at just under US$4bn, is projected to nearly quadruple by 2030. But digital policy experts worry that this tax could stunt that growth.
‘When you want digital growth, taxation this early is a deterrent,’ says cybersecurity and AI adviser Asela Waidyalankara. ‘It creates friction for the very people the government claims to support.’
One concern is contractual rigidity. Freelancers working with overseas clients often agree to fixed rates, and sudden tax-induced cost increases can’t easily be passed on.
Legal gaps
There are also legal gaps. For instance, Sri Lankan VAT law treats tailor-made software as a service (taxable) and off-the-shelf software as goods (non-taxable). A freelancer downloading a ready-made app may not know whether it’s subject to VAT. Nor is there a mechanism to handle hybrid models, such as bundled services or platform fees.
Sri Lanka is leaving a gap between legislation and enforcement capacity
Crossborder gig platforms add another layer of complexity. On Fiverr, for example, payments from Sri Lankan clients go to the platform, which then pays the freelancer, often based in a third country. Who is liable for VAT? The platform? The buyer? The seller?
Some countries, including India, have addressed this by making platforms liable to collect and remit VAT on behalf of non-resident sellers. But Sri Lanka has not, leaving a gap between legislation and enforcement capacity.
This is not the first time the country’s tax structure has drawn scrutiny. The International Monetary Fund (IMF) recently flagged Sri Lanka’s 2.5% stamp duty on foreign card transactions as a distortion. Layering on an additional 18% VAT raises further questions about compliance with IMF commitments, particularly around avoiding multiple currency practices (MCPs).
Tax expert Suresh Perera of KPMG dismisses those concerns. ‘Sri Lanka’s 18% digital VAT, taken alone, is not related to the IMF’s concept of MCPs,’ he says. ‘It doesn’t involve multiple exchange rates or affect currency convertibility. It’s a tax policy decision.’
He also clarifies that the 2.5% stamp duty only applies to credit cards, not debit cards, and that VAT is not calculated on a value inclusive of stamp duty. ‘The VAT is applied on the service value only,’ he says.
Still, many users remain unconvinced, because no one has explained how it works.
Implementation questions
Speaking in Parliament, Deputy Minister of Economic Development Anil Jayantha Fernando defended the policy as a fairness measure and said it had been delayed to allow time for adjustment. What he did not address is how the government plans to implement the tax effectively.
For a country seeking to attract foreign investment, grow its tech sector and retain skilled digital workers, this is a risky place to be. Digital taxation is not unusual. But without clarity, support or enforcement infrastructure, it risks turning a sensible policy into a source of fear and disengagement.
Tech experts argue that the government should focus first on growing the formal digital economy before rushing to extract revenue from it.
If a service is consumed locally, it should be taxed locally. But execution matters. And right now, freelancers and digital entrepreneurs feel caught between the letter of the law and the silence of the institutions meant to implement it.
