Pricing with GCT: shelf prices, working backwards and real margin

Everything in this guide depends on one question. Only a GCT-registered shop charges the tax. In Jamaica you must register once your taxable sales reach J$15 million over 12 months, an average of J$1.25 million a month. If you are below that, you do not add GCT to your prices. The rules, and the exempt goods list, are covered in GCT for small shops in Jamaica. Confirm your own position with Tax Administration Jamaica (TAJ) or an accountant before you change prices.

That gives three kinds of shop, and each one prices differently.

• Registered shop, taxable goods. You add 15% GCT to the price, and you claim back the GCT you paid your supplier.
• Registered shop, exempt goods. You charge no GCT on exempt items, such as many basic foods, and you cannot claim back GCT paid on stock for them.
• Unregistered shop. You charge no GCT. If your supplier's invoice includes GCT, that is simply part of your cost.

At 15%, the formula is short.

Customers in Jamaica expect the shelf price to be the price they pay, with GCT already inside it. So you work out the price you want before tax, then add the tax on top to get the number you print on the shelf.

Notice that J$287.50 is awkward to ring up and to give change for. Most shops round to a friendly number such as J$290. That is a pricing choice, and it changes your margin slightly, so work out the rounded price, not the exact one, when you check your profit.

You often start from the other end. A competitor sells a drink at J$230, or a supplier's recommended retail price already includes GCT. You need to know how much of it is yours.

The common mistake: taking off 15%

On a J$1,000 shelf price, 15% is J$150, which would leave J$850. That is wrong. The J$1,000 already contains the tax, and the tax was worked out on a smaller number. The correct tax is J$130.43. Put another way, GCT is 15 divided by 115, which is 13.04% of any GCT-inclusive price.

The error is not harmless. If a registered shop sold 200 items a month at J$1,000 and reported J$150 of GCT on each instead of J$130.43, it would report about J$3,914 more output tax than it actually collected. That comes out of your own pocket when you pay the return.

A registered shop buys a bottle of juice from its distributor. The invoice shows J$300 plus J$45 GCT, so the shop pays J$345. Because the shop is registered and the juice is taxable, it claims the J$45 back on its return. Its real cost is J$300.

1. Use the cost before GCT

   Real cost is J$300, because the J$45 is reclaimed.

2. Choose your markup on that cost

   The shop wants a 35% markup. 35% of J$300 is J$105, so the price before GCT is J$405.

3. Add GCT

   J$405 x 1.15 = J$465.75. Round to a shelf price of J$470.

4. Check the margin at the rounded price

   J$470 / 1.15 = J$408.70 before GCT. GCT inside the price is J$61.30. Gross profit is J$408.70 minus J$300, which is J$108.70. As a margin on the price before GCT, that is 26.6%.

The margin is measured on J$408.70, not on the J$470 the customer handed over, because the GCT was never yours. Using the shelf price would flatter the result. If you want the difference between markup and margin spelled out, the markup and margin calculator and how to price products cover it.

A shop below the threshold buys the same juice at J$345. It cannot claim the J$45 back and does not charge GCT, so its cost is J$345. It wants a 30% margin on the selling price.

Price = cost / (1 minus margin) = J$345 / 0.70 = J$492.86. Round to J$495. Gross profit is J$150, which is a 30.3% margin. Nothing is added or removed for GCT, because there is none to separate.

Compare the two shops. They sell the same bottle at about the same shelf price, J$470 and J$495, yet the registered shop makes J$108.70 and the unregistered shop makes J$150. The unregistered shop keeps more of each sale because it does not pass 15% on to TAJ. But it also cannot reclaim tax on its stock, and as sales grow past the threshold it will face the same arithmetic as the first shop. Watch how this changes if your growth takes you over the line.

A registered shop that sells exempt basic foods next to taxable goods has a mixed receipt. Take a customer who buys a J$230 drink, which is taxable, and a J$325 pack of an exempt staple.

The exempt item has no GCT to take out. Its cost is whatever the supplier charged, including any GCT the supplier paid and passed along, which you cannot reclaim. If the staple costs you J$250, a J$325 price gives gross profit of J$75, a 23.1% margin. Because you cannot claim back tax on stock for exempt sales, the cost is higher in effect than a taxable item with the same invoice price, and exempt lines often need a slightly higher markup to earn the same margin.

• Decide whether you are registered. If not, price from the full invoice cost, GCT included.
• If you are registered, take GCT out of the supplier's invoice for taxable goods, then price from that cost.
• Mark each product as taxable, zero-rated or exempt before you price it.
• Choose a markup or a margin, and say which one you mean.
• Add 15% by multiplying by 1.15 for taxable goods.
• Round to a convenient shelf price, then recheck your margin at that price.
• When you copy a competitor's price, take GCT out with division, not subtraction, before you compare.
• Review prices whenever a supplier changes the cost, and whenever the GCT rate or threshold changes.

In Shopkeepa you set your shop's sales tax, GCT at the rate you choose, and mark each product as taxable or not. Each product keeps its price and its cost, and where cost is known the reports show gross profit, so you can compare the margin you planned with what you actually earn. Shopkeepa records the tax treatment; it does not file your return.

Shopkeepa is in development and open to early access shops. Read how sales and profit reports work, or try the markup and margin calculator.