VAT ON THE ONLINE WORLD

Ruwandi Perera argues in favour of the new sales tax on digital services

The world has always yearned to be smaller, more connected and linked. The ancient Silk Road connected China with Europe; the spice routes connected the Arab world with the Mediterranean and Indian subcontinent; and the age of discovery saw Europe reaching America and Asia.

Then came the first, second and third waves of globalisation with each transformation making the world look more like a global village.

Although there have been peripheral drivers of globalisation, trade appears to be the impetus and most potent force that makes the world go round.

Globalisation 4.0 is where we are now…

Digital services, which began during the third wave with the advent of the internet, are driving the world through e-commerce, machine learning, AI etc.

These services are around us; and they enable us to access international traders who can reach us digitally. They also give us an opportunity to consume digital products and services that aren’t produced or created locally.

We wake up and scroll content on our preferred social media platform(s), use ride hailing apps to travel to work and utilise online videoconferencing platforms to conduct meetings. Cloud based services, search engines and generative artificial intelligence platforms help us do our work.

Then we travel home, listening to a podcast to avoid wasting time in traffic and eventually wind up watching an episode or two of a TV series on a streaming platform.

And now Sri Lankans are being asked to pay tax on all these digital services, ‘finally.’

Why finally?

Nonresident vendors and marketplaces have been enjoying tax-free operations for digital and electronic services in Sri Lanka for quite some time. Their local counterparts however, have been liable for VAT, income tax and the Social Security Contribution Levy (SSCL).

With the government announcing reforms to ensure that these foreign digital service providers are liable to pay VAT (at 18%) from 1 April, Sri Lanka will be joining the 120-plus countries that impose a value added tax on nonresident digital services.

This will impact many e-products and services including (but not limited to) streaming music and video services, apps, images, online gaming, automated e-learning, search engines, online advertising, SaaS or cloud based software, ride hailing apps, home sharing apps and accommodation platforms.

So what does this mean?

It will mean increased (and perhaps, long overdue) tax revenue to the government, a more level playing field for local digital service providers, and hopefully more innovation and value additions for customers who will nevertheless have to bear some or all of the VAT.

It’s not that having an internet sales tax-free environment has been all bad for the country. It’s encouraged nonresident businesses to offer their services to those living here – and provide customers with more choices for quality and value in their purchases, and more services and products at their fingertips.

But as online sales increase, it becomes necessary to impose a sales tax on online purchases.

Will this discourage nonresident businesses from serving Sri Lankan consumers?

Not necessarily. While smaller online vendors will perhaps be disadvantaged by the need to pay taxes due to the country where their customers are based, it will not deter larger and more established players, simply because it’s a relatively common practice in many parts of the world.

While the risk of smaller players discontinuing operations is likely, this is not necessarily a bad thing – at least when considering the opportunities presented to local players.

This imposition of tax, which will lead to nonresident sellers increasing their rates or prices, might see fewer customers buying online and more of them returning to shops in person. Whether this is good or bad, only time will tell.

On the other hand, local digital vendors will be encouraged and supported by the government; and this will hopefully lead to better quality, more choices, competitiveness and innovation.

Though it may initially startle consumers who are used to enjoying foreign digital services in Sri Lanka at comparatively friendlier rates thus far, this is how things work in other countries.

And with many governments around the world pushing the agenda to charge taxes based on customer location, this will be the norm or the new normal that Sri Lankans will have to get used to.