Yes, Online Business Income Is Taxable

Whether you sell through Facebook, Instagram, your own website, or a marketplace, income from an online business is treated the same way as any other business income by the IRD. “It’s just a side hustle” or “it’s paid to my personal account” does not exempt it from tax.

1. How Online Business Income Is Taxed

If you operate as an individual (sole proprietor), your net profit — total sales minus allowable business expenses — is added to your other income and taxed at the standard progressive rates, starting at 0% on the first LKR 1,800,000 and rising to 36% on the highest slab. If you’ve incorporated a company, profits are taxed at the standard 30% corporate rate, with possible reduced rates for qualifying small companies.

2. Deductible Expenses for Online Sellers

• Cost of goods sold / inventory purchases
• Packaging, courier, and delivery costs
• Advertising spend (Facebook/Instagram/Google ads)
• Platform and payment gateway fees
• Website hosting and domain costs
• A proportionate share of home office or storage space

3. VAT Registration for Online Businesses

If your annual taxable turnover crosses the VAT registration threshold, you are legally required to register for VAT and charge 18% on applicable sales, regardless of whether you operate from a shop, a warehouse, or purely online. See our full VAT registration threshold guide for the current figure.

4. Quarterly Instalments

Once your estimated annual tax liability exceeds LKR 6,000, quarterly SET instalments are mandatory — the same rule that applies to any self-employed individual or business owner.

5. Record-Keeping Is Non-Negotiable

The biggest risk for online sellers isn’t the tax rate — it’s having no records if the IRD asks questions. Keep a simple monthly ledger of sales, expenses, and bank/payment gateway statements. Digital records from platforms like Daraz, Facebook Commerce Manager, or your payment processor are usually sufficient if kept organised.

6. Common Mistakes

• Treating online income as “not really a business” and not declaring it
• Mixing personal and business bank accounts, making it impossible to calculate real profit
• Ignoring VAT registration once turnover crosses the threshold

Calculate Your Tax

Use our free Income Tax Calculator and Quarterly SET Calculator to plan your online business tax.