Concerns mount as SL considers removing VAT exemptions for local digital companies

• Subjecting local digital players to VAT clearly puts them at a disadvantage over foreign rivals
• This could trigger the danger of local digital companies relocating to regions with zero o lower taxes
• Parliament expected to debate and pass VAT (Amendment) Bill today 

As Sri Lanka moves closer to eliminating almost all Value-Added Tax (VAT) exemptions, concerns have been raised about local digital firms facing a disadvantage compared to their global counterparts in the country. 
State Finance Minister Ranjith Siyambalapitiya confirmed yesterday that the VAT (Amendment) Bill would be debated in parliament today and is set to be passed on the same day.
The Bill was initially scheduled for debate in parliament yesterday, but the session was adjourned due to a lack
of quorum.

In addition to hiking the VAT rate by 3 percent to 18 percent, the Bill proposes the elimination of all VAT exemptions, with the exception of education, healthcare, and specific food items, starting next year. This measure aims to increase revenues to meet the targets set by the International Monetary Fund (IMF). 
However, numerous sectors currently exempted from VAT have expressed their concerns about this move, adding complexity to the government’s plans.

One such area is the digital services sector which could see their VAT exemption status being removed from next year making them uncompetitive against their foreign counterparts. 
The matter was recently highlighted by Jiffry Zulfer, the Chief Executive Officer of PickMe, during a post-budget forum held last month. Zulfer proposed that authorities to establish a mechanism to include global digital players in the tax net. 

This, he suggested, would not only create a level playing field but also contribute additional revenues to the government. He expressed willingness to pay taxes and highlighted the importance of fair taxation.
The issue was once again emphasised, this time by the Opposition parliamentarian Dr. Harsha de Silva during the final budget debate held yesterday, before the parliament was adjourned due to lack of quorum.
“Those local firms which develop software and send abroad are not taxed with VAT. But if they sell their products here, they are being taxed with VAT. This issue predominantly came up in relation to how PickMe and Uber are being treated for VAT”, Dr. de Silva said. 

Both PickMe and Uber are ride hailing services operating in Sri Lanka. While the former is subjected to taxes imposed by the Sri Lankan government from time-to-time, the latter is only liable to the taxes of its foreign jurisdiction in which its operations are registered. “Uber is billed in the Netherlands and PickMe is billed in Colombo. The VAT is imposed from where the revenue is billed to. Since it is a foreign service for Uber, they do not have VAT but PickMe falls under VAT. I think it creates a huge non-level playing field,” Dr.de Silva said.  
Speaking at the aforesaid budget forum, Zulfer issued a warning that unless the issue is addressed by establishing a level playing field, there is a risk of undermining the local
digital economy. 

He cautioned that local digital companies might consider relocating to regions with zero or lower taxes while continuing to offer services in Sri Lanka, mirroring the practices of other
global players.
Dr. de Silva said that all stakeholders summoned to the Committee on Public Finance (COPF), which he chairs, last week, have collectively decided to reconvene before the end of the year to provide further insights into how the interpretation of the new law will unfold. 

He highlighted the complexity, noting that VAT is typically determined based on the country where the goods or services are consumed. Exemptions from income taxes or VAT are initially granted with a clear policy objective, either to support growth of a specific industry or to provide relief to consumers.
The government’s attempt to revoke these exemptions has faced considerable challenges and strong opposition from various quarters. As a result, they have been forced to re-evaluate nearly 100 items out of the initially identified 138 set for removal from the exemption list.