A bad time to up profit margins

THE Government hasn’t finished changing the law to pave the way for the introduction of the goods and services tax (GST). The GST Act itself was gazetted on June 19, while several regulations and orders stemming from the act came out on June 30 and July 1.

The latest GST-related adjustments involved the Price Control and Anti-Profiteering Act 2011 (PCAPA). These amendments were published on July 24 and at least a couple of the new provisions may raise eyebrows, if not spark a lively debate.

For example, the Domestic Trade, Cooperatives and Consumerism Minister can now make it illegal to increase the net profit margin of any goods or services during a certain period. Empowering the ministry this way is a surprising move, and it’s likely to cause concern and confusion if the authorities are slow to explain the rationale to the business community.

For that matter, consumers too are waiting to see how the PCAPA will be wielded to counter indiscriminate price hikes.

The legislation is basically a replacement of the Price Control Act 1946, with anti-profiteering provisions added to “curb profiteering activities, thereby protecting the interest of consumers,” according to the Government.

Original version

Under the PCAPA, it’s an offence to profiteer, which is defined as making an unreasonably high profit when selling any goods or services. There is no elaboration on what constitutes an unreasonably high profit, but the act provides for a mechanism to determine whether a profit is unreasonably high.

The Domestic Trade, Cooperatives and Consumerism Minister can prescribe different types of mechanism to suit different conditions and circumstances.

In the original version of the PCAPA, elements that may be taken into account in formulating the mechanism include taxes; the supplier’s cost; supply and demand conditions; conditions and circumstances of geographical or product market; or any other relevant matters in relation to the prices of goods or charges for services.

Profiteering can happen anytime. In fact, most Malaysians will tell you that they’re already paying a lot more for their purchases these days and few of them believe that this is entirely due to higher business costs.

However, judging from the lack of enforcement so far, the PCAPA’s anti-profiteering provisions are geared more towards April next year, when the GST Act comes into force. This has become more apparent with the recent amendments to the act.

A major change is the insertion of a schedule of items that shouldn’t be included as part of the prices or charges for goods or services. It’s a short list. There are only two items, and both (credit for input tax against output tax, and special refund of sales tax) are creations of the GST Act.

The mechanism to determine whether a profit is unreasonably high has also been tweaked so as to include the minister “determining a certain period during which there shall be no increase in the net profit margin of any goods or services.”

This reinforces the principle that businesses shouldn’t be allowed to boost their profitability by exploiting the GST system.

Mitigating factor

During the Parliamentary debates on the bill that contained the PCAPA amendments, the Government said it was working out the right time to invoke the provision that prohibited the increase in net profit margins. It will be before and after April 1 next year, of course. The same measure will probably be used whenever the GST rate is increased.

The Government also said the provision would be applied to all businesses, large and small. That would be the right thing to do, but determining whether a multinational corporation with complex operations is earning excessive profits will be a lot harder than going after a small-time trader who got a little greedy.

Furthermore, how will Malaysia reconcile this provision with trade agreements that demand minimal market interference?

Perhaps, a mitigating factor is that the PCPA has added another element to be taken into account when creating the mechanism to determine whether a profit is unreasonably high – any cost incurred in the course or furtherance of business. Then again, will this category of costs be so broadly interpreted that it will be easy to justify any price hike?

The next round of changes in the law ought to be the issuance of rules and guidelines on the mechanism for detecting profiteering, and these must come fast. The consumers and the businessmen need to be assured that all is being done – and with transparency and fairness – to prepare the country for the big switch to GST.

Executive editor Errol Oh said it last month and he’s saying it again – hopefully, Malaysia will soon experience a sudden awakening to GST’s many issues and effects.