COLOMBO, Sept 19 (Reuters) - Sri Lankan shares fell for a third straight session on Monday to post their lowest closing level in seven weeks, led by Distilleries Company of Sri Lanka due to selling by foreign investors ahead of a change in company ownership.

The benchmark Colombo stock index ended 0.34 percent weaker at 6,450.44, its lowest close since Aug. 1. It fell 0.34 percent last week, its fourth straight weekly loss.

A government proposal to raise the value added tax (VAT) also weighed on sentiment.

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The government said last week the cabinet has approved a proposal to increase VAT to 15 percent from 11 percent with some amendments, a move halted by the Supreme Court earlier.

Distilleries fell 4 percent, with foreign investors selling a net 13,600 shares in the company on Monday.

The company said last month that it would rejig a share ownership with Melstacorp, which is its 100 percent-owned subsidiary.

In a 180-degree share swap, Melstacorp would become the holding company, while Distilleries Company would become a subsidiary of Melstacorp.

Investors would be allotted four shares of the new parent company for each share of Distilleries after the reorganisation, it said.

The reorganisation will occur after Sept. 30.

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"Distilleries dragged the market due to foreign selling. Investors are also not sure how the VAT hike would impact the corporate earnings," a stockbroker said asking not to be named.

Turnover stood at 328.5 million rupees ($2.26 million), less than half of this year's daily average of 742.1 million rupees.

Foreign investors net bought 63.9 million rupees worth of equities on Monday. They have net sold 2.25 billion rupees worth of shares so far this year.

Lanka ORIX leasing Company Plc fell 1.31 percent, while the biggest listed lender Commercial Bank of Ceylon Plc declined 0.42 percent. ($1 = 145.1000 Sri Lankan rupees) (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Biju Dwarakanath)