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VAT in Sri Lanka Overview

Jun 8, 2025

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Overview

This lecture covers Value Added Tax (VAT) in Sri Lanka, focusing on calculation, registration, compliance, and special VAT schemes, with practical examples and exam-relevant rules.

VAT Basics & Importance

  • VAT is Sri Lanka’s top revenue-generating tax, applied mainly to goods and services.
  • VAT is an indirect tax, collected by businesses on behalf of the government.
  • VAT applies to taxable supplies made in Sri Lanka by registered persons or importers.

VAT Registration & Thresholds

  • The registration threshold was LKR 12 million per annum (3 million per quarter), but increased to LKR 300 million per annum (75 million per quarter) from 2020.
  • Importers must register for VAT regardless of turnover, using a temporary or permanent VAT number.
  • Retail/wholesale thresholds: LKR 50 million per annum or 12.5 million per quarter (pre-2020 threshold).
  • Once registered, VAT must be charged even if future turnover falls below the threshold.
  • Registration cannot be cancelled within the first 12 months.

Key Concepts & Calculation

  • Taxable supply: Goods or services in Sri Lanka, excluding exempt supplies.
  • Taxable period: Monthly (for exporters/zero-rated) or quarterly (all others).
  • Time of supply: Whichever comes first—invoice issued, payment received, or goods/services delivered; invoice date if issued within 10 days of supply.
  • Output tax: VAT on sales; input tax: VAT paid on purchases; VAT payable = Output VAT - Allowable Input VAT.
  • Zero-rated supplies (mainly exports) allow input VAT credits; exempt supplies do not.

Compliance & Documentation

  • Tax invoices must include name, address, registration numbers, serial number, and the wording "tax invoice".
  • Customs Goods Declaration serves as a tax invoice for imports.
  • All VAT records/invoices must be kept for five years.
  • Input VAT cannot be claimed without valid tax invoices or on certain expenses (e.g., motor vehicles, unrelated services).
  • Input VAT on local invoices claimable within 12 months; imports within 24 months.

Adjustments & Special Rules

  • Bad debts can be deducted from VAT payable; recovered bad debts are taxable.
  • Credit/debit notes to adjust input tax must be issued within 6 months of original invoice.
  • VAT returns: Filed monthly (zero-rated) or quarterly (others); payment due by the 20th of the following month.

Special VAT Schemes

  • SVAT (Simplified VAT): For exporters and certain projects—uses credit vouchers instead of refunds to minimize admin.
  • VAT on Financial Services: 15% rate, applies to all finance-related activities with registration and filing similar to standard VAT.
  • Tourist VAT Refund Scheme: Non-residents with purchases over LKR 50,000 (max. three invoices) may claim VAT refund on departure; applies only to goods, not services.

Key Terms & Definitions

  • Taxable Supply — Supply of goods/services in Sri Lanka chargeable to VAT, excluding exempt supplies.
  • Input VAT — VAT paid on business-related purchases, claimable against output VAT.
  • Output VAT — VAT collected on sales.
  • Zero-rated Supply — Exports taxed at 0%, input VAT recoverable.
  • Exempt Supply — Goods/services not subject to VAT; input VAT cannot be claimed.
  • SVAT — Scheme minimizing VAT refunds for exporters via credit vouchers.
  • Tax Invoice — Official document required to claim input VAT.
  • Time of Supply — The date when VAT must be accounted for (earliest of invoice, payment, or delivery).

Action Items / Next Steps

  • Review your study manual/study pack for more practice questions and scenarios.
  • Revisit the rules for VAT documentation and invoicing.
  • Prepare for exam questions on thresholds, time of supply, SVAT, and tourist refund schemes.

Full transcript