Is the Digital Services VAT Gazette Ultra Vires? Should the VAT Act Be Amended Again?

The Value Added Tax (VAT) framework in Sri Lanka has undergone several reforms since its inception in 2002. A significant recent development is the imposition of VAT on digital services supplied by non-resident entities to consumers in Sri Lanka, which initially said to be effective from 1 October 2025, where, now there is plan by government to postpone the implementation of VAT on Digital Services until April 2026.

Now that many non-resident service providers are aware that there are wide range of scope of services included under Digital Services VAT. However, if companies comply with tax laws, without thoroughly analyzing the implication of tax laws to their business, the result will be high unnecessary tax cost, and there by increase of prices of their services. Accordingly, the purpose of this article is to provide some different opinion on legality of VAT on digital services in Sri Lanka.

The Digital Services VAT was introduced by amendingSection 2 of the Value Added Tax Act No. 14 of 2002 (VAT Act) and introducing Section 26(1B)to the VAT Act to insert a newVATcharging point“on the supply of services by a non-resident person through an electronic platform to a person in Sri Lanka.”

However, beyond the amendment, the administrative mechanics, particularly the registration, invoicing, and threshold criteria—have been introduced throughGazette Notification No. 2443/30, issued underSection 26(1B)of the VAT Act.

This gives rise to a critical legal inquiry:Can such fundamental tax compliance obligations be introduced by Gazette without a statutory basis?

The Foundation of VAT Charging Provisions

UnderSection 2 of the VAT Act, tax is imposed on:

(a)Taxable supplies made in Sri Lanka by a registered person in the course of a taxable activity;

(b)Importation of goods into Sri Lanka;

(c)(New) Supply of services by a non-resident person through an electronic platform to a person in Sri Lanka.

This amendment attempts to extend the tax net to cross-border digital transactions. However, it’s worth noting thatsubsection (a)discusses the supply being madein Sri Lankaas part of ataxable activity carried out in Sri Lanka, whereassubsection (c)introduces a fundamentally different principle—destination-based consumption.

Is the Digital Services VAT Gazette Legal? A Case of Power Beyond the Law?

TheGazette Notification No. 2443/30 dated Tuesday, July 1, 2025, was issued by the Commissioner General of Inland Revenue (CGIR) under the authority ofsubsection (1B) of Section 26of theValue Added Tax Act, No. 14 of 2002, as amended by theValue Added Tax (Amendment) Act, No. 04 of 2025.

It is important to note thatSection 26 falls under Chapter IV of the Act, titled “Payment of Tax,”which is primarily concerned with themanner and timingof payment, not with thecreation of tax liabilities,registration requirements, ordefining the scope of taxable persons or transactions.

Section26(1B)authorizes the Commissioner-General to prescribe themanner and procedure of paymentof VAT for non-resident suppliers.

Section26(1B) reproduced below:

“(1B) Notwithstanding the provisions of subsection (1) of this section, in the case of a non-resident person who supplies services through an electronic platform to a person in Sri Lanka, the tax in respect of any taxable period, payable on such supply shall bepaid in such manner as may be prescribed and subject to the procedure which may be specified by the Commissioner-General.”

Itdoes notauthorize him to:

• SetVAT rates;
• Defineregistration thresholds.
• Determine who will be liable to tax.
• Restrict service provision by non-residents
• Prescribe the requirement to issue atax invoice.
• Mandatereturn filingorrecordkeeping requirements;
• Allow or restrictinput tax claims.

Thus, to the extent the Gazette attempts to do any of the above, it arguablyexceeds the authoritydelegated by Parliament and is thereforeultra vires.

Underadministrative law, any regulation or Gazette made by a public authority must derive its validity from aspecific empowering provisionin the statute. In tax law, taxpayers must be taxed onlyby clear authority and wording of the law. While gazettes can be used to mention manner and procedure for payment (i.e., specifying whether tax can be paid via bank transfer, cheque, or online portal), they cannot create new liabilities, thresholds, or rights unless the Act expressly delegates such power.

For example, the gazette may prescribe that VAT payments by non-residents should be made in LKR through a designated online platform, but it cannot introduce a VAT registration threshold, unless such a power is clearly granted by the VAT Act itself

Are Existing Provisions Sufficient for Non-Resident Suppliers?

Some tax professionals argue that even ifGazette No. 2443/30is consideredultra vires, thesubstantive requirements outlined therein—such as registration thresholds and return filing obligations—may still standbecause similar provisions already exist within the VAT Act. For example, the registration threshold specified for local suppliers (LKR 60 million annually) could, by implication, apply equally to non-resident suppliers.

However, this interpretation raises a serious legal concern, that the VAT Act’s current language does not expressly extend such provisions to non-resident suppliers. In fact, most operative provisions, such as those found inSection 10 on registration, specifically refer to persons who “carry on or carry out any taxable activity in Sri Lanka”, which is considered absent in the case of foreign digital service providers, based on long standing interpretation of the law.

Thus,the absence of explicit statutory languageto include non-resident suppliers within the scope of these existing rules undermines the argument that they can be automatically applied.

Unless the Act is amended toclearly define the rights, obligations, and thresholds applicable to non-resident suppliers, relying on pre-existing provisions intended for domestic entities may lead tolegal uncertainty and enforceability issues.

This means we need to carefully study each part of the law to see if non-resident persons are clearly included. If they are not, then the law should be properly changed to fix this issue.

Does the Current VAT Act Cover Non-Resident Registration?

Section10of the VAT Act governs registration. It states that:

“Every person who… carries out any taxable activity in Sri Lanka shall be required to be registered…”

Here, the key is that registration is tied to ataxable activity carried out in Sri Lanka. Non-resident suppliersdo not carry out activities in Sri Lanka, and under long-standing interpretation, their supplies are considered madeoutside Sri Lanka, despite consumption occurring locally.

Therefore, even with the new charging point,Section 10 does not accommodate non-resident registration. Creating rules for VAT registration through a Gazette, without amending Section 10 of the VAT Act, may go against important legal rules—such as the need for clear laws.

The Role of Section 20 – Tax Invoices

Section20requires aregistered person who makes a taxable supplyto issue a tax invoice. However:

• The definition of“taxable supply”under Section 83 means suppliesmade in Sri Lanka;
• As established,non-resident suppliers do not make supplies in Sri Lanka;
• And they are notregistered personsunder the current wording of Section 10.

Therefore, non-residents can not issue Tax invoices under current law. Even if they do, such invoices may not be valid forinput VAT claimsby Sri Lankan purchasers, as they do not comply with the statutory framework.

Ambiguities Around the Definition of "Non-Resident Person"

The amendment defines a “non-resident person” as one who “occasionallyundertakes transactions involving supply of services, with no fixed place of business in Sri Lanka.”

This definition raises a further issue:

• Do companies like Uber, Google, LinkedIn, or Zoom, which offercontinuous, automated services, qualify as actingoccasionally?
• If not, they may falloutside the scopeof the new definition, creating alegal loopholein enforcement.

Resulted Practical Consequences and Violation of Principles of Fairness

There are significant consequences of these legal ambiguities, some of which are summarized below:

• Input VAT Claim Denial: Sri Lankan businesses purchasing digital services may not be able to claim input tax credits, creating cost inefficiencies.
• Compliance Uncertainty: Non-resident suppliers lack clarity on their obligations under the Act.
• Discriminatory Thresholds: The Gazette creates thresholds (e.g., LKR 60 million) for non-residents without statutory backing. This risksunequal treatmentbetween taxpayers, violating the principle ofhorizontal equity.

Conclusion: Is Legislative Amendment Required?

In my personal opinion, Yes.While the policy intent is justified—to capture tax revenue from cross-border digital services—the current implementation mechanism is flawed in law.

Sri Lanka must modernize its VAT regime in step with the global digital economy. However,sound tax policy must based on a robust legal foundation. Until such statutory amendments are made, the validity of the current digital services VAT Gazette is highly questionable and may not valid in front of the law.