By: Staff Writer
July 21, Colombo (LNW): Government’s bid to increase revenue through taxing digital payments may clash with IMF policies and risk stifling innovation and digital entrepreneurship.
In a move that could have wide-reaching implications for Sri Lanka’s digital economy and international financial commitments, the government has announced plans to impose an 18% Value Added Tax (VAT) on foreign digital payment platforms such as PayPal, Stripe, and cryptocurrency exchanges, starting October 1.
The decision, unveiled through a Gazette notification, aims to expand the country’s tax net under the International Monetary Fund (IMF)-backed revenue reform agenda. However, the move has raised serious concerns over its economic impact, legality under IMF agreements, and implications for digital innovation and entrepreneurship.
Taxing the Digital Economy
The newly gazetted rules categorize financial technology platforms—including PayPal, Stripe, and crypto exchanges—as liable for VAT on services provided in Sri Lanka. The list also includes a broad range of foreign-supplied digital services such as cloud hosting, software-as-a-service (SaaS), digital advertising, e-commerce platforms, and streaming services.
While such taxation may seem like a progressive attempt to bring digital giants into the national tax framework, Sri Lanka’s move to tax financial services, particularly those that are exempt in well-regulated economies like the UK, EU, and Singapore, appears to be both abrupt and potentially counterproductive.
In many mature economies, financial services like PayPal are exempt from VAT due to the technical challenges in calculating value addition and to avoid cascading tax effects. For example, Singapore recognizes digital payment tokens as a medium of exchange and removed VAT (or GST) on them in 2020 to prevent double taxation and encourage innovation.
IMF Conflict & Risk of Multiple Currency Practices
Critically, this new tax regime may conflict with Sri Lanka’s commitments to the IMF. Under the ongoing Extended Fund Facility (EFF), Sri Lanka has agreed not to introduce or intensify Multiple Currency Practices (MCPs) or other exchange restrictions. The IMF has already flagged a 2.5% surcharge on foreign credit card transactions as a violation, albeit with a temporary waiver.
Analysts caution that layering an additional 18% VAT on PayPal and similar platforms—especially when these services are used to purchase VAT-liable goods or services—could result in total tax burdens of over 36%, due to cascading effects. If this taxation is processed through credit cards, the combined burden could violate Sri Lanka’s IMF performance criteria and affect future disbursements of IMF funding.
Cabinet Spokesman Dr. Nalinda Jayatissa responded to concerns by stating that a special committee has been appointed to review taxes on e-commerce platforms, and possible conflicts with international obligations will be evaluated.
Strangling Startups and Freelancers?
Beyond policy clashes, the 18% VAT could deal a blow to Sri Lanka’s burgeoning digital economy, especially freelancers, startups, and small online businesses. Many tech entrepreneurs rely on PayPal and Stripe to receive international payments, and taxing these platforms could reduce their competitiveness, increase operational costs, and even force some businesses to shut down.
Furthermore, these tax moves may discourage foreign clients from engaging with Sri Lankan service providers due to increased costs and tax complexity—undermining the government’s own digital economy goals.
A Pattern of Crisis-driven Taxation
Sri Lanka’s approach to taxation—especially during economic crises—has often been reactive rather than strategic. The country’s financial system has long operated under outdated frameworks and control-based policies such as forced forex conversions and surrender rules, imposed each time the Central Bank prints money and creates a balance of payments crisis. This pattern has historically led to forex shortages, rate hikes, and IMF bailouts.
Instead of pursuing long-term regulatory reform and economic stability, the government’s repeated reliance on patchwork tax policies erodes public confidence, investor trust, and institutional integrity.
Way Forward: Reform Over Reaction
Experts suggest that instead of hastily expanding VAT to new sectors, Sri Lanka should focus on modernizing its tax collection framework, ensuring consistency with global practices, and incentivizing digital growth. This includes aligning tax policies with IMF commitments, avoiding multiple currency practices, and ensuring that taxation does not penalize innovation or small entrepreneurs.
As global economies increasingly embrace fintech and digital assets, Sri Lanka risks falling further behind if taxation is used as a blunt instrument to patch budget deficits rather than build sustainable, forward-thinking policy.
Bottom Line:
The 18% VAT on PayPal, Stripe, and cryptocurrencies reflects the government’s urgency to expand revenue. However, unless handled with transparency, fairness, and strategic foresight, this tax could backfire—jeopardizing IMF support, choking digital entrepreneurship, and deepening economic uncertainty.
