Sri Lanka – an overview of current indirect taxes

November 22, 2011

Sri Lanka has several indirect taxes, which cover a range of different types of tax including sales taxes, VATs and taxes that have features of both direct and indirect taxing principles.

This article sets out some of the main features of the following key indirect taxes that currently apply in Sri Lanka:

  • VAT
  • Nations Building Tax (NBT)
  • Economic Service Charge (ESC)
  • Telecommunication Levy
  • Construction Industry Guarantee Fund Levy (CIGFL)
  • Tourism Development Levy (TDL)


VAT is a key indirect tax1 that is imposed on every person who carries on a taxable activity and makes a taxable supply in Sri Lanka. VAT is also charged at the point of importation of goods.

The current rates are 12% and 0%. However, it is important to note that several supplies are exempt or excluded from VAT.

The mainstream VAT requires a registered person to pay output tax on all taxable supplies made while allowing credit for input tax on qualifying inputs, up to the limits prescribed in the law.

VAT refunds can only be claimed by taxable persons who make zero-rated supplies (zero-rated persons).

In April 2011, a SVAT was introduced and, as a result, significant changes have been made recently with regard to zero-rated businesses.

VAT is governed by complex legislation, which imposes several important compliance and record-keeping obligations on registered persons.

In addition, special VAT rules and provisions or exclusions apply to specific, identified business sectors, including the following:

Financial services sector

Financial services are exempt from the normal VAT but they are liable to the VAT on financial services (VATFS). For VATFS, the added value is computed based on profits, adjusted for specified items such as depreciation and emoluments.


Exporters and suppliers to exporters come under the new simplified SVAT system.

The system is still being finalized but, essentially, the new law allows taxable persons who make supplies to zero-rated persons (such as exporters) to make supplies based on a suspended VAT invoice.

This reduces the need for the Sri Lankan tax authorities to issue VAT refunds to zero-rated persons, which is a benefit to taxpayers, since such refunds can be claimed only after satisfying a detailed audit process.

Telecommunications sector

Telecommunications service providers are exempt from VAT but liable to the Telecommunication Levy.

Wholesale and retail traders — An important feature in the Sri Lankan VAT system is that the wholesale and retail trading sectors (other than import trading) are excluded from VAT.

These sectors were liable to a sales tax (Turnover Tax) until January 2011 when the Turnover Tax was replaced by the Nations Building Tax (NBT).

Nations Building Tax (NBT)

NBT2 is an indirect tax imposed on manufacturers, importers and businesses providing services.

It was extended to trading activities effective from January 2011. NBT is payable on gross sales at the rate of 2% (previously 3%). The NBT law prescribes several excepted articles and excepted services that are not liable to NBT.

Economic Service Charge (ESC)

ESC functions as a direct and indirect tax. ESC is payable at a maximum rate of 1% of a business’ “liable turnover.”

However, taxpayers who are liable to income tax may set off ESC paid against their income tax liability and, in such cases, ESC becomes an advance payment of income tax.

ESC can also be carried forward for five years. For businesses that are not liable for income tax, ESC becomes a final tax. Certain business sectors are charged with lower rates of ESC.

Telecommunication Levy

The Telecommunication Levy3 is imposed and collected by the Telecommunications Regulatory Commission of Sri Lanka.

In brief, it is a special indirect tax charged at the rate of 20% which applies exclusively to providers of telecommunication services.

The levy was introduced effective from 1 January 2011 and, at the same time, telecommunications were excluded from VAT.

Construction Industry Guarantee Fund Levy

(CIGFL) CIGFL is payable by persons who enter into a construction contract and it is deducted at source by the party (the employer) making the payment. The maximum rate is 1% (based on the contract value).

Tourism Development Levy (TDL)

Every institution that is licensed under the Tourism Development Act (such as tourist hotels, travel agents and tourist shops) is required to pay TDL.

The levy is charged at 1% based on turnover.

Implications for business

As can be seen, Sri Lanka has several types of indirect taxes that apply depending upon the business transaction.

Each of these taxes is imposed on a prescribed base (i.e., gross receipts or turnover) depending on the tax involved.

Each tax also involves a multitude of compliance and record-keeping obligations (such as issuing prescribed tax invoices within the specified time limits, filing monthly or quarterly returns) and each imposes penalties for non-compliance.

All of these taxes also provide for a number of exemptions and exclusions for which preconditions (as stated in each law) must be satisfied.

Taken together, the multiplicity of taxes, specific provisions and obligations mean that businesses need to pay careful attention to indirect taxes when doing business in Sri Lanka.

In particular, the impact of the various indirect taxes is an important consideration when determining the costing and pricing of goods and services, since most of these taxes are imposed on the gross receipts or turnover of a business.

Failure to take these charges into account could have a material impact on margins if the tax is not recovered on expenditure or if it is not built into the price of supplies made.


  • Lakmali Nanayakkara, +94 112 463500,
  • Velauthapillai Shakthivel, +94 112 436500,

This article was first published in the Ernst & Young Indirect Tax Briefing which can be accessed using the link below:


  1. VAT is imposed by the Value Added Tax Act No. 14 of 2002 (as amended)
  2. NBT is imposed under the Nations Building Tax Act No. 9 of 2009 (as amended)
  3. The Telecommunication Levy is imposed under the Telecommunication Levy Act No. 21 of 2011
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