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Implications of New Cost Audit Rules on CMA's

Kapil Kaushik 
on 23 January 2015

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In exercise of the powers conferred by sub-sections (1) and (2) of section 469 and section 148 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules to amend the Companies (Cost Records and Audit) Rules, 2014

INTRODUCTION

The much awaited cost records and audit rules, which were in the news for all the reasons during the past few months, have been finally notified by the MCA. The amended rules have seen mixed reactions from the corporate world and Institute of Cost Accountants of India (ICAI). However, the premier institute for Cost Accounting in India has deliberately asked its professional members to refrain themselves from making any comments on the new rules, based on their personal professional competence. Since it affects the interests of thousands of CMA’s across the nation, the institute first wants to go through in details of the new laws, and then only it will be able to comment anything on this matter.

DETAILS OF THE NEW RULES

The details of the notification are available on the MCA website. However, some of the most salient points have been discussed in course of this report:

- The threshold limit has been reduced down to 35 crores against 100 crores of what was notified in the draft rules devised in June 2014.

- The ministry has introduced six major regulated sectors which are: Telecommunication Services, Generation, distribution, and regulation of Electricity, Petroleum industry, Drugs and Pharmaceuticals, Fertilizers, and Sugar (Industrial Alcohol). The following table shows the detail of these industries:

REGULATED SECTORS

Sl. No.

Industry/ Sector/ Product/ Service

CETA Heading 
(wherever applicable)

1.

Telecommunication services made available to users by means of any transmission or reception of signs, signals, writing, images and sounds or intelligence of any nature (other than broadcasting services) and regulated by the Telecom Regulatory Authority of India under the Telecom Regulatory Authority of India Act, 1997 (24 of 1997);

Not applicable

2.

Generation,  transmission,  distribution and supply of electricity regulated by the relevant regulatory body or authority under the Electricity Act, 2003 (36 of 2003), other than for captive generation (referred to in the Electricity Rules, 2005);

——

3.

Petroleum  products regulated by the Petroleum and Natural Gas Regulatory Board under the Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of 2006 ;

2709 to 2715;

4.

Drugs and pharmaceuticals;

2901  to 2942;  3001  to

3006.

5.

Fertilisers;

3102 to 3105.

6.

Sugar and industrial alcohol;

1701; 1703;2207

 

(Table Adopted from the MCA)

Besides the regulated sectors, the ministry has also named a number of Non-regulated sectors that should be included in the purview of the new audit rules. The major industries in the Non-regulated sector are Arms and Ammunitions, Turbo Jets, Steel, Aeronautics, and Coffee and Tea, etc. Non-regulated Sector includes the following comprehensive list of industries:

NON REGULATED SECTOR

Sl. No.

Industry/ Sector/ Product/ Service

CETA   Heading (wherever applicable)

1.

Machinery and mechanical appliances used in defence,  space  and  atomic energy sectors  excluding any ancillary item or items;

Explanation.  – For the purposes of this sub-clause, any company which is engaged in any item or items supplied exclusively for use under this clause, shall be deemed to be covered under these rules

8401 to 8402;  8801 to 8805; 8901 to 8908

2.

Turbo jets and turbo propellers;

8411

3.

Arms and ammunitions;

3601 to 3603; 9301 to 9306.

4.

Propellant powders; Prepared explosives (other than  propellant   powders);   safety   fuses; detonating fuses; percussion or detonating caps; igniters; electric detonators;

3601 to 3603

5.

Radar   apparatus,   radio   navigational   aid apparatus and radio remote control apparatus;

8526

6

Tanks and other armoured fighting vehicles, motorised, whether or not fitted with weapons and parts of such vehicles, that are funded (investment made in the company) to the extent of ninety per cent. or more by the Government or Government agencies;

8710

7

Port services of stevedoring, pilotage, hauling,. mooring,   re-mooring,  hooking,  measuring, loading and unloading services rendered by a Port in relation to a vessel or goods regulated by the Tariff Authority for Major Ports under section  III  of the Major Port Trusts Act, 1963(38 of 1963);

Not applicable

8.

Aeronautical services of air traffic management, aircraft  operations,  ground  safety services, ground handling, cargo facilities and supplying fuel rendered by airports and regulated by the Airports Economic Regulatory Authority under the Airports Economic Regulatory Authority of India Act, 2008 (27 of 2008);

Not applicable.

9.

Steel;

7201 to 7229; 7301 to 7326

10.

Roads   and   other   infrastructure   projects corresponding to para No. (1) (a) as specified in Schedule VI of the Companies Act, 2013;

Not applicable

11.

Rubber and allied products being regulated by the Rubber Board constituted under the Rubber Act, 1947 (XXIV of 1947).

4001 to 4017

12.

Coffee and tea;

0901 to 0902

13.

Railway or tramway locomotives, rolling stock, railway  or  tramway  fixtures  and  fittings, mechanical  (including  electro  mechanical) traffic signalling equipment’s of all kind;

8601 to 8608

14.

Cement;

2523; 6811 to 6812

15.

Ores and Mineral products;

2502 to 2522;  2524 to 2526; 2528 to 2530; 2601 to 2617

16.

Mineral fuels  (other than Petroleum), mineral oils etc.;

2701 to 2708

17.

Base metals;

7401 to 7403;  7405 to 7413; 7419; 7501 to 7508; 7601 to 7614; 7801 to 7802; 7804; 7806; 7901 to 7905; 7907; 8001; 8003; 8007; 8101 to 8113.

18.

Inorganic  chemicals,  organic  or  inorganic compounds of precious metals, rare-earth metals of radioactive elements or isotopes, and Organic Chemicals;

2801 to 2853; 2901 to 2942; 3801 to 3807; 3402 to 3403; 3809 to 3824.

19.

Jute and Jute Products;

5303, 5310

20.

Edible Oil

1507 to 1518

21.

Construction industry as per pars No. (5) (a) as specified in Schedule VI of the Companies Act, 2013 (18 of 2013)

Not applicable.

22.

Health  services,  namely functioning as or running hospitals, diagnostic centres, clinical centres or test laboratories;

Not applicable.

23.

Education  services, other than such similar services falling under philanthropy or as part of social spend which do not form part of any business.

Not applicable.

24.

Milk   Powder ;

0402

25.

Insecticides;

3808

26.

Plastics and polymers;

3901 to 3914; 3916 to 3921; 3925

27.

Tyres and tubes

4011 to 4013

28.

Paper;

4801 to 4802

29.

Textiles;

5004 to 5007; 5106 to 5113; 5205 to 5212; 5303; 5310; 5401 to 5408; 5501 to 5516

30.

Glass;

7003 to 7008; 7011; 7016

31.

Other machinery

8403 to 8487

32.

Electricals or electronic machinery;

8501 to 8507; 8511 to 8512; 8514 to 8515; 8517; 8525 to 8536; 8538 to 8547

33.

Production, import and supply or trading of following medical devices, namely:-

(i) Cardiac stents;

(ii) Drug eluting stents;

(iii) Catheters;

(iv) Intra ocular lenses;

(v) Bone cements;

(vi) Heart valves;

(vii) Orthopaedic implants;

(viii) Internal prosthetic replacements;

(ix) Scalp vein set;

(x) Deep brain stimulator;

(xi) Ventricular peripheral shud;

(xii) Spinal implants;

(xiii) Automatic impalpable cardiac deflobillator;

(xiv) Pacemaker (temporary and permanent);

(xv) Patent ductus arteriosus, atrial septal defect and ventricular septal defect closure device;

(xvi) Cardiac re-synchronize therapy ;

(xvii) Urethra spinicture devices;

(xviii) Sling male or female;

(xix) Prostate occlusion device; and

(xx) Urethral stents:

9018 to 9022

 

(Table Adopted from the MCA)

After understanding the applicability of the act over various industries, let us take account of the regulations which will cover the audit rules:

- As per Rule 3 of the new audit rules, any organization which falls within the purview of the first regulated industries (either one of the six mentioned), then such organization needs to carry out compulsory cost audit provided the annual turnover from the goods and services supplied during the past financial year is more than Rs 50 crores.

- Talking about maintenance of cost audit records, the threshold limit shall be Rs 25 crores in case of the regulated sectors.

- In case of the Non-Regulated sector, the requirement of cost audit comes with the threshold limit of Rs 100 crores as turnover during the past financial year.

- However, the regulation to maintain the mandatory cost records shall be Rs 35 crores in case of Non-Regulated Sector.

Besides this, the companies which are represented by either regulated or non-regulated sector shall be exempted from these regulations if they are operating from SEZ (Special Economic Zone) or whose income includes export incomes (in foreign exchange) more than 75% of its total revenues.

The cost audit could be carried out by a Cost Auditor in practice, who is a member of Institute of Cost and Management Accountants of India (ICAI).

AUTHOR’S VIEW

Since the institute and professional body which is going to get affected by the new rules is the ICAI, I am still waiting for their official review of these rules. The technical committee constituted by the institute is working to analyze the new rules and its implications on thousands of practicing CMA’s shall be clear only when the institute comes out with a statement. Some of the newspapers have already published the displeasure of some of the key members of the ICAI in regards of the new rules. However, the real picture will be clear only when the rules are applied in the corporate sector.

Taking account of my personal view, I am very hopeful about these changes and its impact on the corporate world. The new government at the centre has talked a lot about encouraging the manufacturing sector. In this context, I expect a constant increase in the demand of cost accounting and audit. Since the government is favouring the manufacturing sector, the overall revenues and turnover of the companies in various sectors, as discussed above shall increase drastically.   


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