Computation of margins

S R Balachandran, Council Member
The National Chamber of Commerce of Sri Lanka

It is very important for importers, manufacturers and service renderers to fix their margin properly on sales to secure targeted profit.

Targeted margin is to be achieved after payment of VAT, NBT and turnover tax to Provincial Councils upto December 31, 2010. In accordance with the Budget Proposal 2011 Turnover tax to Provincial Councils has been abolished from January 1, 2011.

Further wholesale and retails trade have been included in the Nation Building Tax system and NBT rate is reduced from 3 percent to 2 percent from January 1,2011.

The effective NBT rates for wholesale and retail trade is 1 percent as 50 percent of Turnover only is liable at 2 percent.

The following information is necessary;

Cost - Landed cost of an article includes CIF, all Customs duties bank and clearance charges VAT must be excluded from landed cost as it is a selling overhead.

However NBT has to be included in the landed cost in the case of importers.

In the case of manufacturer who imports articles for manufacturing, NBT paid at customs is excluded from cost as it is a selling overhead.

In the case of service renderers NBT paid at source has to be included in the cost as it cannot be claimed as qualified input claim. It is a selling overhead as well (double charges). This must be understood clearly.

Margins are usually computed on sales which include vat as well. Some people compute margins, on sales (excluding vat) and cost as well.

The following mathematical formula is important to

a. Compute margin on agreed sales and cost

b. Compute sales on agreed margin and cost

c. Compute cost on agreed margin and sales

By using this formula a discussion could be held with foreign principals pertaining to CIF and margin.

S = Sales (including VAT)
C = Cost (landed cost)
M = Margin in percent on sales
VAT = 12 percent , 0 percent only
NBT = 2 percent , 1 percent (effective) , 0 percent