Sri Lanka has decided to defer the implementation of its controversial 18% Value Added Tax (VAT) on digital services offered by non-resident companies, following pushback from global online platforms and travel service providers warning of possible withdrawal from the local market.
Originally slated to take effect from October 1, 2025, under the Value Added Tax (Amendment) Act No. 4 of 2025, the levy will now be introduced on April 1, 2026, Cabinet Spokesman Dr. Nalinda Jayatissa announced yesterday.
The tax targets international digital service providers offering services to Sri Lankan consumers, including Booking.com, Agoda, Expedia, Airbnb, Netflix, and Meta (Facebook and Instagram). Many of these firms, citing compliance difficulties and rising operational costs, have expressed concerns that the tax could make the Sri Lankan market less attractive. Some are reportedly reviewing their level of engagement, while smaller platforms have hinted at potential withdrawal if the policy is enforced without transitional measures.
According to industry insiders, Booking.com and Agoda have already flagged difficulties in integrating Sri Lanka’s VAT rules with their global billing systems, warning local hotel operators that additional costs may be passed on to end customers. Similarly, Airbnb is assessing whether compliance with the VAT regime is commercially viable given Sri Lanka’s relatively small market compared to regional tourism hubs.
For the travel and hospitality industry—currently on a revival trajectory after years of crisis—the move could not have come at a worse time. Tourist arrivals in 2025 have already surpassed 1.49 million by August, with the Government targeting 3 million visitors and USD 5 billion in revenue by year-end. Analysts warn that withdrawal or reduced engagement by global booking platforms would severely affect Sri Lanka’s international visibility and online accessibility.
Local hoteliers and tour operators fear that additional costs on digital services could ultimately be passed on to consumers, eroding competitiveness against regional rivals such as Thailand and Malaysia, where digital VAT regimes are either lower or more investor-friendly.
The Government, however, insists that the tax is necessary to ensure equity in revenue collection, arguing that domestic companies already bear VAT obligations while global digital giants earn significant profits without contributing to the Treasury. “The policy decision stands firm, but we are granting more time for non-resident providers to comply with VAT requirements,” Dr. Jayatissa said.
While the deferral offers breathing space, stakeholders remain divided. Some welcome the delay as a chance to align systems and negotiate compromises, while others fear the looming deadline could still drive international service providers to scale back operations.
The next six months will be critical in determining whether Sri Lanka can balance much-needed revenue mobilisation with maintaining its appeal to international platforms vital for tourism, e-commerce, and digital connectivity.
