ECONOMYNEXT – Sri Lanka is planning to charge 18 percent value added tax on Paypal, which is considered a financial service and also Stripe, at a time when smaller taxes on credit cards have fallen foul with the International Monetary Fund, under new rules to tax foreign services.
“Financial Technology (FinTech): online banking, payment processors (PayPal, Stripe, and crypto currency
exchanges),” the new gazette requiring VAT to be collected by foreign platforms from October 01 says.
Paypal, which is a financial service, is exempt from VAT in countries like UK and the EU which has well-functioning tax systems.
36 percent VAT?
Stripe, which also collects money on behalf of third parties is subject to a so-called ‘reverse charging’ process which nets off the value added tax on the underlying service, in countries with well-functioning systems.
Paypal however has a service where they can collect VAT on behalf of the underlying service or good, when payment is made.
By charging VAT on services like Paypal and Stripe, the State can also collect VAT from people who are buying underlying services which fall below the 60 million rupee threshold sanctioned by parliament, analysts say.
Financial services are an exempt service for VAT in countries with well-functioning tax systems.
Sri Lanka’s chaotic tax system, which is put into further chaos with ad hoc new taxes in IMF programs that follow each currency crises triggered by rate cuts, also has a tax on financial services unlike in other countries.
The so-called ‘financial VAT’ operates mostly on a base of emoluments and acts like an additional income tax in Sri Lanka.
Sri Lanka is also charging a 2.5 percent tax on foreign purchases via credit cards, which has been deemed a violation of IMF rules on external payments and amounts to a Multiple Currency Practice.
Since Paypal is used to make payments for an underlying service, or a good, Sri Lankans could end up paying more than twice the VAT rate or 36 percent plus the credit charge taxes when buying services and also goods, online.
Multiple Currency Practice?
If the existing 2.5 percent on credit cards is not removed (the IMF has given a waiver at the moment), the VAT on services overall would be even higher than 36 percent through credit cars, including due to cascading effects.
Under the IMF program Sri Lanka has not undertaken to introduce new MCPs while seeking approval to maintain the existing ones as a continuous performance criteria.
“We are seeking temporary approval of all exchange restrictions and MCPs,” the latest IMF program documents said.
“During the program period, we will not: (i) introduce or intensify exchange restrictions or multiple currency practices (MCPs).”
It is not clear whether taxes on VAT on Paypal and Stripe would lead to violating IMF rules.
Controls after Money Printing
Asked whether taxing Paypal or Stripe would lead to problems with IMF’s MCP rules, Cabinet spokesman Nalinda Jayatissa said the concerns could be referred to a new government committee appointed to look into taxation of e-commerce platforms sales.
“Those issues can be discussed at the committee and a solution found,” he said.
Last week President Anura Dissanayake appointed a committee to look into import duties charged for small items imported through online payments systems.
Sri Lanka tightens existing exchange controls and imposes new rules such as surrender rules for export earnings (called Capital Flow Measures by the IMF) whenever the central bank prints money to cut rates and worsens forex shortages.
Sri Lanka’s central bank has imposed exchange controls on the people for decades due to a fundamentally flawed operating framework which violate classical economic principles, primarily Hume’s price-specie-flow mechanism.
The violations (anchor conflicts) worsen with violent rapidity, when outflows are sterilized (offset) with newly printed money to keep rates down, against the teachings of Classical Greats including Adam Smith and David Ricardo.
Then rates are eventually pushed up violently stop private credit and restore the lost confidence in the currency and new taxes are imposed to boost revenues and reduce government credit under an IMF program.
Then the IMF says the new controls are either MCP or CFMs or both. The cycles repeat endlessly as macro-economists try to manipulate rates down as private credit recovers.
Cryptocurrency
According to the gazette notice on Value Added Tax for foreign supplied services, Sri Lanka is also planning to tax blockchain platforms.
Digital payment tokens are exempt from value added tax in better managed countries including Singapore (where VAT is called the Goods and Services Tax) on the realization that the cryptocurrencies are a medium of exchange.
“Global development and growth in the use of cryptocurrencies have caused tax jurisdictions to review their GST position on cryptocurrencies transactions,” Inland Revenue Authority of Singapore said in a notice after ending taxes on crypto.
“Similarly, IRAS has reviewed its GST position to keep up to date with these developments.
“In particular, IRAS recognises that taxing cryptocurrencies that function or are intended to function as medium of exchange (that is, digital payment tokens) results in two tax points — once on the purchase of the cryptocurrency and again on its use as payment for other goods and services subject to GST.
“To better reflect the characteristics of digital payment tokens, with effect from 1 Jan 2020, the supply of such tokens will no longer be subject to GST. The change in GST treatment does not represent IRAS’ endorsement of cryptocurrency investments.
Unlike Sri Lanka, which hikes taxes after each currency crisis, the Singapore Monetary Authority has an operating framework consistent the price-specie-flow mechanism (no policy rate) and therefore do not experience forex shortages and does not go the IMF or suffer negative growth from stabilization crises.
According to a gazette notice by the Department of Inland Revenue, the following foreign supplied services and platforms will be subject to VAT subject to thresholds from October 01.
1. Supply of Services through an Electronic Platform
i. Cloud Computing: Hosting, storage and computing power services,
ii. Software as a service (SaaS): Web-based applications,
iii. E-commerce Services: Online stores, payment gateways, and order fulfilment services,
iv. Digital Marketing and advertising: SEO, social media marketing, PPC ads, and email marketing, v. Cybersecurity Services: Threat detection, firewall protection, and data encryption,
vi. IT Support & Managed Services: Remote tech support, IT consulting, and helpdesk solutions, vii. Streaming Services: Video, music, live content platforms,
viii. Financial Technology (FinTech): online banking, payment processors (PayPal, Stripe, and crypto currency
exchanges),
ix. E-commerce Platforms, x. Social Media Platforms,
xi. On-Demand Service Platforms, xii. Content Sharing Platforms,
xiii. Cloud collaboration platforms, xiv. Marketplace Platforms,
xv. Gaming Platforms,
xvi. Blockchain & NFT Platforms: OpenSea, Binance, Ethereum-based Apps,
xvii. Subscription to membership websites,
xviii. Use of apps for hotel reservation, ticket booking.
(Colombo/July20/2025)
