How much profit can an entity registered on PAN/VAT can make?

Profit is a financial gain from the difference between Selling Price and Purchase Price. Higher the gap between selling price and purchase price, higher the profit. Thus, there is an infinite potential for profit. However, business cannot sell their goods if the price is too high and the customers targeted can't afford to pay the set price. At the same time, if the price is set too low, business might not recover all the costs incurred in importing or manufacturing goods or providing services; ultimately, have to close the shop.

I must at this point, tell you that neither Income Tax nor Value Added Tax law determine how much profit a business can make. It is general understanding that necessary tax invoice shall be issued on the price the good or services is sold. Similarly, necessary taxes must be paid as defined by the Income Tax law.

At this time, I think its important for us to understand how is purchase price and selling price determined. Let's start our discussion with purchase price and then, we can move to selling price.

a) Purchase Price: For a manufacturing business, we should focus on the Nepal Accounting Standard (NAS) on Inventory. According to NAS, cost of inventory comprise:

 1) Cost of purchase comprises of:

            - Purchase Price

            - Import Duties & other duties except those refunded by government.

            - Shipping and handling costs, and

            - Other costs directly attributable to the acquisition of the finished goods, materials and services.

 2) Cost of conversion comprises of:

            - Direct labor

            - Variable and allocated manufacturing overheads

 3) Other costs incurred in bringing the inventories to their present condition and location.

 For a service business, purchase price wouldn't include clause (1) but would include the all direct and attributable costs necessary to provide such services to the customer.

b) Selling Price: Selling Price for layman is cost plus markup. Markup so that business have extra margin to continuously improve on their product/service or drive their research & development for innovative products. For economists, is demand and supply. Higher the demand, higher the price. Lower the demand, lower the price. But, it is not is simple as it sounds. There are numerous other factors that are considered; few listed below:

            - target customer and their purchasing capacity.

            - nature of the goods i.e. basic consumer goods or luxurious or entertainment or special goods.

            - availability in the market i.e. monopoly vs competition

 In a way, selling price must be reasonable that can attract the customer at the same time recover the cost and margins enough to sustain the business.

However, with the above information, it is still not answered whether a business registered in PAN/VAT have any cap on how much profit it can earn? Well, upon research, I came across the the law that is in effect from 1975 and its called Black Marketing and Some Other Social Offenses and Punishment Act, 2032. 

According to Section 3 of the act, in case of the business trading the goods where price is not prescribed by the government, business cannot markup their price by more than 20%. It is applicable even during the time of a shortage in the market. If a business does so, there is punishment of imprisonment for a term not exceeding 1 years or with a fine of Rs. 250,000 or both. This is not applicable incase of recovery of the export loss; in such a case a price can set to cover up the losses during the trading of the subsequent imports.

Here business includes manufacturer, importer and distributor identified by Nepal Government as the authorized manufacturer, importer and distributor of concerned goods and such names is published in the Nepal Gazette. 

Act under Section 2 (a), Act has also given an explanation as to while fixing the retail or wholesale price, businesses shall take into consideration the following, which is more or less is in the spirit of Nepal Accounting Standard.

    - the price of the goods.

    - transportation fare and rent.

    - custom duties

    -  taxes, fees  and all reasonable expenses permission under prevailing law

    - operational expenses

    - reasonable commission of the dealer, retailer or agent, and

    - reasonable profit of the producer or the importer.

Then, the question pops, what about other goods where Nepal Government has set the price? If the business sells on the higher price, such business shall be punished with imprisonment for a term not exceeding 1year, with also a fine of Rs 10 Lakhs, and forfeiture of the goods. This fine is also applicable if the business sells their goods higher than those set by manufacturer, wholesaler or distributor.