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Sri Lanka Increases Standard VAT Rate to 12% and Planning Further Tax Reforms to Increase Revenue — Orbitax Tax News & Alerts

The Sri Lanka Inland Revenue Department has issued a Notice to VAT Registered Persons on changes in the VAT rates as per the Extraordinary Gazette Notification No. 2282/26, published in the Official Gazette on 31 May 2022. The notification was issued as part of government tax reform plans to increase revenue and provides the following VAT rates with effect from 1 June 2022:

  • 0% on the import of goods (fabrics) set out in the H.S. Code and description specified in Columns I and II of Schedule of the Extraordinary Gazette Notification No. 2095/20 of 1 November 2018; and
  • 12% on the import and/or supply of goods or supply of services, other than the import of goods (fabrics) referred to above (up from 8%).

The notice also clarifies that the 12% VAT rate applies on the supply of services by a hotel, guest house, restaurant, or other similar businesses providing similar services, registered with the Sri Lanka Tourism Development Authority, for which a 0% VAT rate was previously provided from 1 December 2019. Lastly, it is clarified that the increased VAT rate of 18% on the supply of financial services from 1 January 2022 continues to apply.

Another tax reform measure to apply with effect from 1 June 2022 is an increase in the telecommunications levy from 11.25% to 15%, which is to be implemented via a letter from the Telecommunications Regulatory Commission. Further measures are planned to be implemented from 1 October 2022 and 1 April 2023, including an increase in the standard corporate income tax rate to 30% along with an increase in the concessionary rate to 15%, a reduction in the VAT registration threshold to LKR 120 million, the removal of certain tax holidays, and several other measures. These are to be implemented through amendments to the relevant Acts. Details on the implementation of these other measures will be published once available.