Understanding GST Profit Margin
For traders and wholesalers, calculating the right profit margin is crucial. In the GST regime, profit should be calculated on the base price (exclusive of tax) because the GST paid on purchases (Input Tax) can be adjusted against the GST collected on sales (Output Tax).
How is Profit Calculated?
The formula for Net Profit in a GST-registered business is:
Net Profit = (Selling Price - Cost Price) - Operating Expenses
The GST Liability is calculated as:
GST Payable = Output GST (on SP) - Input Tax Credit (on CP)
Importance of Input Tax Credit (ITC)
The biggest advantage of GST is the Input Tax Credit. It allows you to reduce the tax you have already paid on inputs while paying the tax on output. This effectively prevents "tax on tax" and helps in maintaining better profit margins.