Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on January 16 - 22, 2017.

LAST Friday morning, the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC) held a briefing for industry players on the newly gazetted Price Control and Anti-Profiteering (PCAP) Regulation 2016. The turnout was good, with more than 100 participants from 51 organisations.

Numerous issues were raised by those affected by the new regulation, but many left the briefing with their questions unanswered.

It is understood that the MDTCC will issue guidelines next month to explain the newly gazetted law.

To recap, the PCAP Regulation 2016 was issued by the MDTCC in late December last year. It came into effect on Jan 1, and applies only to the food and beverage and household goods sectors.

The new regulation has a narrower scope than the PCAP Regulation 2014, which covered all goods and services. It also does not have an expiry date, unlike the previous regulation that was in effect from Jan 2, 2015, to Dec 31 last year.

Under the PCAP Regulation 2016, profit will be considered “unreasonably high” if the markup percentage or margin percentage of the goods sold exceeds the markup or margins of those goods on the first day of that particular financial year or calendar year. It takes into account the increment of the percentages of the two years preceding the particular year.

Businesses have three months from Jan 1 to comply with the regulation. Thereafter, action will be taken should businesses be found to be profiteering under the formula prescribed in the regulation.

The MDTCC told the briefing that businesses found to be making unreasonably high profits will be given 7 to 30 days to rectify their margins or markup percentages. Those that fail to make the rectification on time will be prosecuted.

Some participants who attended the briefing highlighted that the new regulation appears to penalise efficiency.

“If we follow the formula strictly, even if a business’ margins go up because it has increased the efficiency of its processes, it will be deemed to be profiteering and be penalised,” says a tax consultant.

To add to the confusion, the regulation does not seem to consider businesses that quote different prices to different customers, nor whether the formula is to be applied on an outlet basis or across the whole business.

In addition, traders who adopt different pricing strategies for different seasons — like selling cheap during a particular period and at a higher price at other times in order to even out margins — would also be considered to be profiteering under the present regulation.

A participant pointed out that profit margins would be locked in under the new regulation, giving businesses no leeway to increase prices because the determination of an unreasonably high profit is compared with the selling prices of the preceding years.

Another key point brought up by the MDTCC is that the calculation of the margin percentage or markup will be based on the business’ gross margin. This could have grave implications for businesses.

“This means that even if I invest in research and development to make my product superior to my competitors’, I cannot charge a higher price. Why can’t my business be rewarded for the R&D I put into the product?” laments a food manufacturer.

Costs like R&D, staff, marketing and selling expenses are not included in the cost of goods sold when the gross margin is calculated.

Against this backdrop, business entities that employ higher paid professional managers to improve quality and efficiency would be at the losing end as the formula caps gross profit margins.

Participants also brought up the fact that the regulation appears to be a hindrance to free trade. Many take the view that pricing should be left to market forces. If prices are too high, they say, market forces will force them out of business.

“At the end of the day, any increase in prices is dependent on the demand. If consumers don’t buy our products because of high prices, there is no point in raising prices anyway,” says a consumer product manufacturer.

A tax consultant commented that the formula prescribed in the regulation is not practical for businesses, adding that companies would find real difficulty in applying it.

“The formula is too academic. Businesses don’t use this type of formulas to determine their margins and markups. Having this regulation in place sort of forces them to conduct their businesses in a specific way. It is not practical at all,” says the tax consultant.

Many are hoping that the guidelines to be issued by the MDTCC next month will help iron out some of the kinks in the new regulation.

However, the tax consultant says the guidelines are not binding and, at the end of the day, it means that it is up to the authorities to interpret how best to apply the broad-based regulation.

 

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