Set up National Council for Cost Competitiveness to harness benefits of Cost audit
Published: Sep 14, 2016
"COST accountants are engaged in a much more difficult and complicated kind of task, a task in which the country is much more interested. In the other case, it is a question of shareholders not being defrauded or the owner of a concern knowing that his accounts are correct or the Government getting the income-tax properly; otherwise, the amount may be incorrect. But in this case, the matter concerns the whole country. It affects our whole economic development. An industry should have the lowest cost of production so that its products may be able to compete in the world markets and in our own markets also. So, this subject of cost and works accounting is very important. It is a very advanced and specialised branch and it should be treated separately. There is no doubt about it. I am also glad that the Government has now taken the trouble of organising it into a Separate body and setting up a new Institute of Cost and Works Accountants."
That was Parliamentarian Dr. P.J Thomas sharing his vision for cost audit as omnipotent facilitator for economic development while participating in a debate on the Cost and Works Accountants Bill, 1958 in Rajya Sabha on 10th December 1958.
Another MP, R.P. Sinha struck a similar chord. He stated: "it is not enough to have cost accounting on the whole, but, Sir, it is important that we should have cost accounting, as explained by the previous speaker, for every stage of production. Then alone we can have a correct appraisal both of the productivity of labour and of management."
This perspective, which didn't get requisite attention in the past, is more relevant today. Cost efficiency is vital for success of Modi Government's 'Make in India' initiative. It has been launched to reverse the alarming decline in share of manufacturing in gross domestic product over the last 20 years. Post economic reforms beginning mid-1991, many companies stopped production or went of business as they realized that they were not cost competitive against imports. Low-cost imports of components, sub-assemblies and finished products became the liberalization-age mantra.
Entrepreneurs now realize that their projects have to be cost-competitive right from the inception stage. This realization obviously calls for whole-heartedly embracing of cost audit, mandatory or voluntary as the case may be.
Cost accountancy and audit (CAA) is also lately getting added importance due to proposed roll-out of Goods and Service Tax (GST). Both the Centre and States would not like revenue leakages during the teething phase of its implementation.
Realizing this, the Institute of Cost Accountants of India (ICMAI), formerly ICWAI, has done commendable spadework to play major role in implementation of GST.
In a document captioned 'An Insight of GST in India' Volume I released in October 2015, ICMAI has specified role of Cost & Management Accountant (CMA) during different phases of GST execution. ICMAI considers valuation of stock transfer under GST regime a major challenge. The Document says: "There shall have be to an absolute dependence on Material Accounting and/or reliance on Cost records to arrive at the proper Valuation of 'stock transfer'. It is strongly recommended that the valuation of stock transfer be certified by 'Cost Accountant' only, as it is under the existing provisions of the Central Excise Rules. This is recommended to be made in line with CAS-4 Certification."
It adds: " In order to establish an efficient plan for purchases and supply, a careful study of GST is required. A CMA is competent to analyze the impact of various alternatives and choose the most optimum way of doing business in order to minimize the tax impact."
ICMAI has planned a slew of guidance notes on GST which it intends to release in the coming months. Yet another factor that can put CCA in limelight is India's commitment at G20 for implementation of Base Erosion and Profit Shifting (BEPS) action plan. It has been conceived to prevent multinationals from resorting to aggressive tax avoidance. ICMAI intends to bring out a guidance note on transfer pricing aspect of BEPS project. ICMAI has urged Finance Ministry to recognize CMAs in 'Accountant' definition of the Income Tax Act, 1961.
As put by Chairman, Taxation Committee of ICMAI, Ashok B. Nawal, "This is long pending agenda. We have taken lot of efforts last year and more efforts will be taken in this year " to convince authorities to accept this suggestion. CAA's effective utilization is also crucial for preventing big-ticket scams such as over-invoicing of coal imports, under-statement of revenue by telecom service providers, subsidy leakages and other corporate frauds. ICMAI is gradually achieving success on this front. According to ICMAI President M.K. Thakur, Institute's initiatives has helped Department of Fertilisers in forming a panel of practising cost accounting firms for examining cost data of phosphatic and potassic companies.
It is indeed unfortunate that policy-makers and entrepreneurs have acted half-heartedly on transforming CAA as competitiveness tool since the enactment of Cost and Work Accountants Act in 1959. CAA has also not been used as an effective mechanism to prevent abuse of dominant position by leading companies and to facilitate justice to consumers. Nor has it been used as policy signal to enhance competition in the domestic market. Enhanced competition in the market puts pressure on companies to attain cost competitiveness and cut the price of goods and services. CAA's potential as a mechanism for preventing tax evasion and for optimizing tax collections has been appreciated the least by the Government. Short-sighted people have projected CAA as nuisance in the age of market-driven economy and as a hindrance in the ease of doing business (EDB). CAA can, on the contrary, can be turned into a facilitator of EDB if it is used sincerely to cut cost of all inputs through judicious sourcing of all inputs.
The first step for putting CCA at the centre-stage of economic reforms has to be transparency and consistency. The Government must make public rationale for excluding or including any industry under cost accounting record rules (CARR) issued under the Companies Act, 2013. Simultaneously, it must bring aviation, shipping and ports and telecom services under CARR.
The Government reduced the number of regulated and unregulated industries under CARR from 44 under Companies Act, 1956 to 38 at present (since July 2016) under the Companies Act 2013. The exclusion and inclusion of industries as reflected through CARR amendment rules in 2014 and 2015 imply corporate lobbying. The Government should also make public its decisions to order inspection into accounts of companies after receipt of cost audit reports. Such case-by-case decisions on investigations smack of arbitrariness. They bristle with suspicion of influence-peddling, if not of corruption. The inspection reports should be made public to apprise the public about corporate malpractices.
This will help investors, auditors, whistle-blowers and analysts take the right calls on the companies. Free access to such reports in itself would act as deterrent against any corporate malpractice. The Ministry of Corporate Affairs (MCA) should proactively disclose information about the work done by its Cost Audit Branch (CAB). Its mandate includes all matters falling under purview of Section 148 of the Companies Act, 2013. These include policy framing for cost accounting records and audit, processing of cases for exemption under Section 462 from the provisions of Section 148, analysis of cost audit reports and seeking further information from the companies, sharing these reports with other departments and regulatory authorities and identifying cases that call for inspection.
According to latest available annual report on the working of Companies Act, CAB received 5,342 Cost Audit Reports (CARs) and 11,024 Cost Compliance Reports from companies during 2013-14. It shared a measly 233 such reports with various government entities such as Anti-dumping Directorate and Tariff Commission of the Ministry of Commerce and Industry, National Pharmaceuticals Pricing Authority, Competition Commission of India (CCI), etc.
It is highly unlikely that CAB or any other relevant government agency does sector-wise cost analysis of CARs. MCA should thus direct CAB to share all relevant cost audit reports with the relevant ministry or regulator. Such analysis is crucial for understanding the scope for improvement in cost efficiency of each sector/industry/product. The results of such analysis should be shared with the industry, without breaching confidentiality of company-specific data.
Such cost studies are vital for restructuring tariffs, fine-tuning policies and removing supply bottlenecks. This brings to the need for creating an umbrella organization, say, National Council for Cost Competitiveness (NCCC). As put by Committee for Formulation of MCA's Data Dissemination Policy in its report issued in June 2013, "The cost audit reports filed by select group of companies contain valuable information that can be used for several economic and regulatory purposes like rational price discovery of products/services, evidences against cartelization, discovering anti-dumping duty on products to protect domestic industries, estimating tax revenue to government from sale of product/services, policy on government subsidies to different industries and/or products, etc. by companies."
MCA should take initiative for setting up NCCC, which should issue every year a report titled 'State of Cost Efficiency.' This would help the country pull CCA from its backyard to the centre-stage of economic resurgence and good governance. Apart from listing work done by different CAA-type entities within the Government, the proposed Report should consolidate cost savings data scattered in firms' annual reports into cost saving trend analysis. The report should highlight a few trail-blazing stories of cost efficiency, especially the companies that successfully complete their turnaround from sickness to profitability.
NCCC should comprise Finance Ministry's Chief Advisor Costs (erstwhile Cost Accounts Branch of world war era), MCA's CCI, Department of Industrial Policy and Promotion's Tariff Commission, Chemical and Fertilizer's Ministry Fertilizer Industry Coordination Committee (FICC), Power Ministry's Bureau of Energy Efficiency (BEE), Finance Ministry's Tax Policy Research Unit and Director General, Safeguards (DGS), Commerce Department's Director General of Anti-Dumping and Allied Duties (DGADAD) and other Government entities that focus on costing/pricing studies.
Sector-specific regulators often hire consultants to vet the project cost and tariff proposals of different companies/projects. Such studies are deemed cost audit and they should thus also be shared among different entities under the aegis of NCCC.
The need for regular coordination of work done by different entities can be appreciated by taking up elaborating role of few entities.
CCI, for instance, is empowered to commission a cost study under The Competition Commission of India (Determination of Cost of Production) Regulations, 2009 issued under Competition Act 2002 (Competition Act). The Regulation says:
"Where an enterprise disputes the cost determined by the Commission under regulation 3, it may, for reasons to be submitted in writing, request the Commission to appoint expert (s) for determining the cost. On consideration of the request made by an enterprise, the Commission may, if it so decides, appoint expert(s) of its choice, at the cost of the enterprise making the request, to enable it to determine the cost."
Information about such studies commissioned by CCI is hard to come by. CCI, however, sometime faces handicap of non-availability of cost data while processing complaints from different companies. This underscores the need for bringing in more industries under CARR.
In the HT Media Ltd. vs Super Cassettes Industries Ltd - 2015-TIOLCORP-62-CCI. (SCIL) case, it was alleged that the latter, as the largest publisher of Indian music, abused its dominant position in contervention of section of 4 of Competition Act. According to CCI's annual report for 2014-15, SCIL charged excessive amount as license fees/ royalty for grant of rights for the broadcast of its music content on Fever 104 radio station; and (ii) imposing minimum commitment charges (MCC) per month irrespective of actual needle hour. This limits the choice of music for the end consumers to only SCIL's music content and results in denial of market access for other music companies with less market share and bargaining power. It was also alleged that SCIL infringed section 3 of the Act by requiring radio stations, including Fever 104, to enter into a license agreement which permits the licensees to broadcast music subject to acceptance of onerous conditions.
The imposition of MCC on private FM radio stations was an abuse by SCIL under section 4(2)(a)(i) of the Competition Act. The Commission, however, observed that in the absence of the cost data, it would be difficult to term the price charged by SCIL at Rs.661 per needle hour as such being excessive solely on the basis that it is higher than the price charged by the competitors of SCIL.
One can get a similar insight into CAA work done by other entities. Unfortunately, no effort has been made to collate & analyze all cost data to improve the economy's cost competitiveness of agriculture, manufacturing, mining and services sectors. Will the Prime Minister take a urgent call on this issue?
(Naresh Minocha, is a veteran journalist and specializes in telecom, energy, chemicals, agriculture, economic reforms and governance. In his over 36-years journalistic career, he has worked in different capacities for both Indian and foreign media organizations.)
