ICMAI
THE INSTITUTE OF COST ACCOUNTANTS OF INDIA
Dear Member,
The report of the Committee constituted by the Govt. of India on 04.10.2023 to “review the existing framework of Cost Accounting Records and Cost Audit to improve the usefulness of the Cost Audit Reports in various sectors of the economy” has been published by MCA for eliciting of public comments. The same is available on the link e-Consultation of the Ministry of Corporate Affairs. The views may kindly be sent on that link.
For the ease of members, the members can view the report by clicking here. A brief synopsis of the report is also be viewed by clicking here. Members are requested to kindly go through the same. Members may kindly write to the Ministry on the areas they feel have remained untouched or should be included or aspects which will make the Cost records/ audit concept more relevant from the point of view of Industry or the Govt. itself. Kindly mark a copy to PD & CEP Committee also so that consolidated views can be forwarded to the Govt. as well.
Best Regards
M K Anand
Chairman PD & CEP Committee
Executive Summary
1. Introduction (Chapter – 1):
1.1 Provisions for Maintenance of Cost Records and Cost Audit are provided in the Section 148 of the Companies Act, 2013. The Ministry of Corporate Affairs, Government of India (MCA) notified the Companies (Cost Records and Audit) Rules, 2014 (CCRA Rules 2014) which was subsequently amended from time to time.
1.2 In order to review the existing framework of Cost Accounting Records and Cost Audit and to improve the usefulness of the Cost Audit Reports in various sectors of the economy, a Committee has been constituted with the approval of Hon’ble Minister of Finance and Corporate Affairs vide OM dated 4th October, 2023 and 12th January, 2024.
1.3 The Committee was constituted under the Chairmanship of Chief Adviser (Cost), Department of Expenditure, Ministry of Finance and comprises of ten other members from different Departments/ Ministries. Secretaries/ Head of the organisations were requested to nominate their officers, not below the rank of Joint Secretaries, from their Organisation/ Department/ Ministry, as members of this Committee.
1.4 Terms of Reference of the Committee, inter alia, includes-
(i) To make recommendations about the usefulness of the Cost Records and Cost Audit Reports in various sectors of the economy; in particular, to make recommendations about the sectors for which the requirement of maintenance of Cost records and conducting cost Audit may be no longer necessary, and, about the new sectors where maintenance of such records/conduct of such audit may be considered.
(ii) To Review the implementation of CCRA Rules 2014; in particular, to review the Manufacturing and Service Sectors/Areas covered under CCRA Rules 2014 for
Maintenance of Cost records and Cost Audit and identify the Codes for the same.
(iii) To review Existing formats and procedures for Cost Records and Cost Audit
(iv) To make recommendation on principles for selecting sectors for review of Cost Audit Reports on a periodic basis.
(v) Any other matter related to or incidental to the above which the Committee may decide to consider.
1.5 The Committee invited comments/ suggestions from the Institute of Cost Accountants of India, five major Industry Associations [Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce & Industry (FICCI), Associated Chambers of Commerce and Industry of India (ASSOCHAM), PHD Chamber of Commerce and Industry (PHDCCI) and Standing Conference of Public Enterprises (SCOPE)] and various Central Government Ministries/ Departments and Regulatory Bodies. After analyzing written comments/ suggestions from the stakeholders and other relevant aspect/ data in detail, the Committee arrived at its recommendations which are included in this report.
1.6 The Committee deliberated that the suggestions of this Committee may not be limited to the purview of the Companies Act only, as its terms of reference refer to recommendations related to the Public Finances of Central and State Governments and any other matter related to or incidental to the above which the Committee may decide to consider. Therefore, the Committee is of the view that the recommendations of the Committee may involve a holistic perspective, keeping in mind the nation’s interests. Accordingly, it was decided to deliberate whether Cost Audit may be extended to other entities like trusts, cooperatives, autonomous bodies etc.
1.7 The Committee decided to examine the role of Cost Audit for Government’s long term infrastructure projects especially when a large number of the ongoing projects are facing time and cost overruns and how a regular Cost Audit or any other similar overseeing mechanism may help in high value projects, schemes and Govt. procurements which may give a multi-fold advantage to all the stakeholders including Government.
1.8 Relevant data was obtained from the MCA in order to have a detailed analysis of industry coverage for maintenance of cost accounting records and cost audit. Extensive Data was analyzed as available in public domain related to allocation of budgetary allocation to revenue and capital expenditures to various sectors, allocation to large infrastructure projects and orders placed by the government for major contracts, services and procurements of goods etc.
1.9 The Committee, after holding seven meetings during its tenure, finalized the report analyzing the representations/ comments/ suggestions of the Institute of Cost Accountants of India (ICMAI), All India Cost and Management Associations, Industry Associations and various Government Department/ Ministry/ Regulatory Bodies.
2. Economic Scenario and need for Cost Accounting and Cost Audit framework (Chapter-2):
2.1 India’s economic landscape has witnessed a profound transformation over the years, shaped by a series of policy reforms, globalization, technological advancements, and changing market dynamics. To sustain the growth momentum, the Indian government is proactively investing in capital spending on infrastructure and assetbuilding projects. The Production Linked Incentive (PLI) Scheme for different sectors exemplifies a strategic initiative aimed at enhancing India’s manufacturing capabilities.
2.2 This evolution has not only propelled India onto the global stage but has also posed challenges and opportunities for businesses operating in the country. Against this backdrop, to remain competitive in the global market, the need for effective cost management and transparency has become increasingly critical.
2.3 After independence, India adopted a socialist economic model with a focus on central planning. The government played a significant role in various sectors, and there was an emphasis on public sector enterprises. Government of India followed an industrial policy, which was based on control and licensing of industries.
2.4 Companies Act, 1956 was amended in 1965 to incorporate the provisions relating to the maintenance of cost accounting records to ensure that in respect of Companies engaged in production, processing, manufacturing or mining activities, proper records relating to utilisation of material and labour are available which would make the efficiency audit possible.
2.5 India was the first country to prescribe cost accounting record rules in respect of industries/class of companies and their audit by independent cost auditors appointed with the prior approval of the Government in the context of frauds committed by the Dalmia Jain Group of Companies and Enquiry Report submitted by the Vivian Bose Commission of Enquiry (1963). The main reason for introduction of Cost Audit by statute was to increase the effectiveness of the existing financial audit with a view to detect and deal with the cases of dishonesty and frauds.
2.6 Presently the Government’s thrust on Capital expenditure, particularly in the infrastructure-intensive sectors like roads and highways, railways, and housing and urban affairs, has long-term implications for growth. To push for enhancing Capex from all directions, the Centre announced several incentives to boost states’ capital expenditure in the form of long-term interest-free loans and capex-linked additional borrowing provisions.
2.7 It has been observed that there is huge budget outlay for major schemes and projects of the Central and State Governments. The committee deliberated the magnitude of the budget outlays for public expenditure by Central and State Governments and existing monitoring mechanism of these projects.
2.8 Apart from huge expenditure incurred for infrastructure projects, Defence procurements, Government is providing huge subsidies in Fertilizers, Food and Petroleum Sector. Further, substantial expenditure is being spend in PLI schemes to boosts manufacturing of some indigenous products.
2.9 In addition to Central Government, all State Governments also incur large amount of public funds. A substantial amount is incurred on different social sectors like Education, health, water supply, urban development by State Governments.
2.10 Very large amount of public funds is being used by both Central and State Governments for different projects and schemes every year. These amounts are collected through different taxes and duties from the public. Therefore, effective and efficient utilisation of public funds is very important.
2.11 Data of Ministry of Statistics and Programme Implementation (MOSPI) show that there is 26.53% cost overrun in 848 delayed projects as on 01 st January 2024. The costing framework is required to help the Government sector to use cost data for better decision making and monitoring of various ongoing projects.
2.12 During the deliberations in the committee meetings, it was felt that there is a need to develop the cost database based on cost accounting records and cost audit provisions for major sectors of economy for the benefit of different Government Departments, regulatory authorities and other bodies. This would result in greater accountability of government expenditure. This would improve transparency and uniformity across sectors. Cost database need to be developed gradually. This must be done in a systematic manner so that the data is used effectively for various policy decisions.
2.13 Based on cost database, benchmark cost of major products and services may be developed. Operating ratio of major services need to be decided. This database will help in cost-benefit analysis of future activities.
2.14 In an environment of increasing foreign trade under WTO regime, dumping of products at very low prices have become a serious issue in the international trade. This dumping of products, often well below the cost price, if not properly countered may harm the indigenous industry. The cost records and the cost audit report play a very critical role in defense of local industry to substantiate their fair approach against any allegation of dumping. Similarly, when dumping allegations are levied against the exports by the Indian companies to any foreign company, the Cost Audit Reports can provide the valuable feedback to protect the interest of Indian companies.
2.15 The practice of selling below cost to ward off competition attracts the penal provisions of the Competition Law. This necessitates the availability of authentic cost details of the products marketed by industry and business houses to determine normative pricing or fair pricing. In fact, Competition Law to be effective against any anti-competition activity presupposes the availability of reliable and authentic cost data.
2.16 The transfer pricing issue has gained considerable momentum in international scenario. The fundamentals of transfer pricing are based on “arm’s length” throughout the world. The cost details form the very basis of determining arm’s length transfer pricing policy of any country. An audited cost records and the resultant Cost Audit Report becomes a major source of information, which can be effectively used by both Indirect and Direct Tax Authorities.
2.17 There is a need to build cost consciousness within the Government in the Sectors where major expenditure are incurred by the Government. Cost Audit of the products/ services where Government is the major buyer directly or indirectly (like Cement, Steel etc that are used in infrastructure projects) will help in cost reduction and control of Government expenditure. Further, there is also needs to cost control in the sectors where subsidies are provided by the Government.
2.18 The Committee is of the view that from the Corporate Governance angle, maintenance of Cost Records and Cost Audit plays an important role. Costcompetitiveness being a key to success in a global market, one can hardly do away with maintenance of cost records and their cost audit as it is an important tool for healthy growth of economy in general and individual companies in particular. Further, Cost Audit plays a pivotal role in promoting transparency and accountability in the financial management of businesses as it ensures that costs are accurately recorded, allocated, and reported. This process aids in identifying inefficiencies, improving cost control measures, and enhancing overall operational effectiveness.
3. History of Cost Accounting and Cost Audit Framework in India (Chapter-3):
3.1 In India, the framework of cost audit was initially introduced in 1965 when Companies Act, 1956 was amended to incorporate the provisions relating to the maintenance of cost accounting records and cost audit vide the Companies (Amendment) Act, 1965.
3.2 Section 209(1)(d) was implemented by the Government in stages by notifying Cost Accounting Records Rules (CARRs) in the 44 industries. The companies engaged in the production, processing, manufacturing or mining activities in respect of industries or products specified were required to keep cost accounting records.
3.3 Vested with the powers under section 233B, Government ordered for audit of cost accounting records in large number of companies falling within the scope of these 44 industries. To regulate the operation of section 233B, Government also notified Cost Accounting Report Rules in 1968. These rules were later amended in 1996, 2001 and 2006.
3.4 To review & rationalize the cost accounting and cost audit mechanism, MCA constituted an Expert Group in 2008. Based on the recommendations made by the Expert Group, the Central Government, in supersession of all the then existing 44 records rules & one report rules, notified the 6 industry-specific Cost Accounting Records Rules 2011, common Cost Accounting Records Rules 2011 for other Sectors and Common Cost Audit Report Rules 2011.
3.5 Further, the provisions relating to cost accounting & audit were combined in a single section 148 in the Companies Act, 2013 and were made operational through notification of the CCRA Rules, 2014.
3.6 Empowered under section 148 of the Companies Act 2013, and in supersession of all the then existing 2011 Rules, the Central Government through the Ministry of Corporate Affairs (MCA) notified the Companies (Cost Records and Audit) Rules, 2014 vide GSR 425(E) dated June 30, 2014.
3.7 Based on the recommendations made by a Committee constituted by the MCA, these rules were substantially modified vide notification dated December 31, 2014. Subsequently, amendments were made on 12.06.2015, 14.07.2016, 07.12.2017, 20.12.2017, 03.12.2018, and 15.10.2019.
3.8 The Committee feels that to improve the utility of cost data to all stakeholders, there is a need to make necessary changes in the Cost Audit Report structure by including industry specific reporting relating to few sectors to align with the overall policy of those sectors. The report may include Key Performance Parameters for the Audit Committee & Board, especially for the Independent Directors, to evaluate product/ activity-level & business vertical-wise performance to take effective business decisions. Finally, there should be an additional focus to strengthen corporate governance & sustainability.
4. International practices of Cost Accounting and Cost Audit (Chapter-4)
4.1 In each country (including the USA, UK, Germany, Canada, Japan, Australia, China, France, South Korea, Poland, South East Asia, etc.) there exists a distinct mechanism for gathering cost data and information, a process that must undergo certification or audit by external agencies or auditors.
4.2 Global practices allow either a single institute (in countries with only one professional accounting body) or multiple professional institutes to interchangeably certify or audit cost data, financial data, or secretarial data without specific restrictions. India (like some other SAARC countries) have a unique model for professional bodies, comprising three entities – The Institute of Chartered Accountants of India (ICAI), The Institute of Cost Accountants of India (ICAICMA), and The Institute of Company Secretaries of India (ICSI). Since their inception, each institution has been given a well-defined role. Also, these Institutes have been allowed to undertake financial audits, cost audits and secretarial audits respectively, in accordance with their designated functions as defined by the Acts passed in the Parliament.
4.3 The Committee has noted a brief synopsis of the practices followed in few developed & developing economies with respect to the cost accounting policies, cost records, cost accounting standards, cost audit/examination, regulatory practices & requirements, and filing of cost information.
4.4 The Committee noted that IFAC published an international public sector study titled, “Perspectives on Cost Accounting for Government”. This study provides a description of how cost accounting can be used to assist and satisfy government information objectives and the related cost accounting processes. Cost accounting system and cost reports is useful tool for the public authorities to gauge efficient deployment of public resources, monitor the outputs & outcomes of various public policies, schemes & programs. Cost audit is of immense assistance to governments in helping for tax optimization, dealing with transfer pricing matters, valuation of inventories and segmental reporting.
4.5 The Committee observed that Cost Accounting practices in different countries are guided by each country’s development level, prevalence of cost maturity models, regulatory practices & requirements, taxation policies, and policies of protectionism & competition.
4.6 The Committee noted that cost accounting framework exists in almost all economies in its varied content & application. Generally, public procurement contracts follow the country’s laid down costing principles and the business entities are required to share their cost details with the procuring authorities on demand.
4.7 A large number of regulatory bodies seek cost information; the prime being the tax authorities, trade commissions, anti-trust bodies and competition commissions. Similarly, regulators dealing with public services such as energy/ electricity, communication, postal services, water, civil aviation, railways, etc. seek cost details from the participants.
4.8 The Committee further noted that the practice of cost audit also exists, albeit, in limited form. A few countries have also issued Cost Accounting Standards. It was observed that Governments of various countries have traditionally played a major role in the evolution of cost accounting practices.
4.9 The Committee observed that in India, mandatory provisions in the Companies Act 1956 & 2013 along with the Companies (Cost Records & Audit) Rules 2014 created cost culture across industries and companies. The Committee is of the view that the transitory phase through which India is passing, having moved from being underdeveloped to a fast-developing economy and gradually heading towards the developed economy, it still requires suitable legal framework for Cost Records maintenance and Cost Audit.
5. Stakeholder Consultations (Chapter-5)
5.1 The Committee made consultations with various stakeholders to arrive at decisions on the issues relating to the Terms of Reference of the Committee. Comments/ Suggestions/ Representations were received from The Institute of Cost Accountants of India, five major Industry Associations [Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce & Industry (FICCI), Associated Chambers of Commerce and Industry of India (ASSOCHAM), PHD Chamber of Commerce and Industry (PHDCCI) and Standing Conference of Public Enterprises (SCOPE)], All India Cost & Management Accountants Association and various Central Government Ministries/ Departments and Regulatory Bodies.
5.2 The Committee noted the views/suggestions made by different Central Government Ministries/Departments and Regulatory Authorities. The Committee also noted the views/suggestions made by Industry Associations, Institute of Cost Accountants of India and All India Cost & Management Accountants Association. The Committee deliberated in detail and has taken appropriate views on each issue which are reflected in the relevant Chapters of this Report.
6. Coverage of Companies under Maintenance of Cost Records and Cost Audit framework (Chapter – 6)
6.1 This chapter mainly covers the committee’s deliberation and recommendations on the following issues as per Terms of Reference of the Committee –
- To review the existing sectors and to make recommendations about the sectors for which the requirement of maintenance of Cost records and conducting cost Audit may be no longer necessary, and, about the new sectors where maintenance of such records/conduct of such audit may be considered.
- To Review the implementation of Companies (Cost Records and Audit) Rules, 2014 (CCRA Rules 2014);
6.2 On the classification of industries/sectors into regulated and non-regulated Sector under CCRA Rules 2014, the Committee recommends abolishing the classification of sectors into regulated and non-regulated. Instead, a single table/list of industries/sectors/products/services may be covered under the CCRA Rules 2014.
6.3 The Committee in addition to the factors laid down in the Terms of Reference of the Committee, laid out certain parameters for selection of any sector for Cost Accounting Records and Cost Audit framework. The Committee recommends, out of 39 sectors presently covered under CCRA Rules 2014, to retain 35 sectors and 4 sectors to be removed. Some Additional sectors were also recommended by the Committee to be included within the purview of Cost record maintenance and Cost Audit framework.
6.4 The Committee also decided to accept the report of the separate Committee constituted to identify Service codes and recommends adopting the same under the CCRA Rules.
6.5 The Committee recommends the revised list of sectors/industries/ products/ services along-with the CTA/Service codes (based on NPCS) is given below:
| Sl. No. | Industry/ Sector/ Product/ Service | Customs Tariff Act Heading (wherever applicable) |
| 1. | Telecommunication
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 and regulated by the Telecom Regulatory Authority of India under the Telecom Regulatory Authority of India Act, 1997 (24 of 1997); including activities that requires authorization or license issued by the Department of Telecommunications, Government of India under Indian Telegraph Act, 1885 (13 of 1885); |
Refer Appendix-2 |
| 2. | Electricity
Generation, transmission, distribution and supply of electricity regulated by the relevant regulatory body or authority under the Electricity Act, 2003 (36 of 2003); |
Generation- 2716;
Other Activity- Refer Appendix-2 |
| 3. | Petroleum and Natural Gas
Petroleum products; including activities regulated by the Petroleum and Natural Gas Regulatory Board under the Petroleum and Natural Gas Regulatory Board Act, 2006 |
2709 to 2715; Other Activity-Refer Appendix-2 |
| 4. | Health and Pharmaceutical | |
| (a) Drugs and pharmaceuticals; | 2901 to 2942; 3001 to 3006. | |
| (b) 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) Orthopedic implants; (viii) Internal prosthetic replacements; (ix) Scalp vein set; (x) Deep brain stimulator; (xi) Ventricular peripheral shud; (xii) Spinal implants; (xiii) Automatic impalpable cardiac defibrillators; (xiv) Pacemaker (temporary and permanent); (xv) Patent ductus arteriosus, atrial septal defect and ventricular septal defect closure device; (xvi) Cardiac re-synchronise therapy; (xvii) Urethra spinicture devices; (xviii) Sling male or female; (xix) Prostate occlusion device; and (xx) Urethral stents: |
9018 to 9022 | |
| (c) Health services, namely functioning as or running hospitals, diagnostic centres, clinical centres or test laboratories; | Refer Appendix-2 | |
| 5. | Fertilisers; | 3102 to 3105. |
| 6. | Food and Public Distribution | |
| (a) Sugar and industrial alcohol; | 1701; 1703; 2207. | |
| (b) Edible Oil; | 1507 to 1518 | |
| (c) Storage for Agro-products covered under PDS | Refer Appendix – 2 | |
| 7. | Defence
(a) 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; 8801 to 8805;8807; 8901 to 8908. |
| (b) Turbo jets and turbo propellers; | 8411 | |
| (c) Arms, ammunitions and Explosives; | 3601 to 3603; 9301 to 9306. | |
| (d) Propellant powders; prepared explosives (other than propellant powders); safety fuses; detonating fuses; percussion or detonating caps; igniters; electric detonators; | 3601 to 3603 | |
| (e) Radar apparatus, radio navigational aid apparatus and radio remote control apparatus; | 8526 | |
| (f) 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 | |
| (g) Specialized vehicles for defence forces, Police forces, paramilitary forces, space and atomic energy procured by Govt. | NA | |
| (h) Unmanned Aircraft | 8806 | |
| 8. | Port Services
Port services of stevedoring, pilotage, hauling, mooring, re-mooring, hooking, measuring, loading and unloading services rendered for a Port in relation to a vessel or goods. |
Refer Appendix-2 |
| 9. | Aeronautical services
Aeronautical services of air traffic management, aircraft operations, ground safety services, ground handling, cargo facilities and supplying fuel rendered at the airports and regulated at the Airports Economic Regulatory Authority under the Airports Economic Regulatory Authority of India Act, 2008 (27 of 2008); |
Refer Appendix-2 |
| 10. | Iron and Steel; | 7201 to 7229; 7301 to 7326 |
| 11. | Construction Services relating to following infrastructure projects where Govt. expenditure is involved:
(a) Roads, national highways, state highways, major district roads, other district roads and village roads, toll roads, bridges, highways and other road related services. (b) Industrial, commercial and social development relating to real estate development, including an industrial park or special economic zone (c) Irrigation, dams, and flood control waterworks (d) Urban and Rural housing including public/mass housing up to carpet area 60 sq mtr. |
Refer Appendix-2
NA |
| 12. | Railways | |
| (a) 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 8609 | |
| (b) Construction Services relating to railway infrastructure projects- Rail systems, Metro rail and other railway related services | Refer Appendix-2 | |
| 13. | Cement; | 2523; 6811 to 6812 |
| 14. | Mining and Mineral | |
| (a) Ores and Mineral products; | 2502 to 2522; 2524 to 2526; 2528 to 2530; 2601 to 2617 | |
| (b) Mineral fuels (other than Petroleum), mineral oils etc.; | 2701 to 2708 | |
| (c) Base metals; | 7401 to 7403; 7405to 7413; 7419; 7501 to 7508; 7601 to 7614; 7801 to 7802; 7804; 7806; 7901 to 7905; 7907; 8001; 8003; 8007; 8101 to 8113. | |
| (d) 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 and 3827 | |
| 15. | Jute and Jute Products; | 5303, 5307, 5310 |
| 16. | Education services
Education services, other than such similar services falling under philanthropy or as part of social spend which do not form part of any business; |
Refer Appendix-2 |
| 17. | Plastics and polymers; | 3901 to 3914; 3916 to 3921; 3925 |
| 18. | Electricals and Machinery | |
| (a) Other machinery and Mechanical Appliances; | 8402 to 8487 | |
| (b) Electricals or electronic machinery; | 8501 to 8507; 8511 to 8512; 8514 to 8515; 8517; 8525 to 8536; 8538 to 8547. | |
| 19. | Pulp and Paper | 4701 to 4704; 4801, 4802, 4804 and 4808 |
| 20. | Tyres and Tubes | 4011 to 4013 |
| 21. | Insecticides | 3808 |
| 22. | Textiles | 5004 to 5007; 5106 to 5113; 5205 to5212; 5303; 5307;5310; 5401 to 5408; 5501 to 5516 |
| 23. | Gems and Jewellery | NA* |
| 24. | Films, Media and Entertainment | NA* |
| 25. | Waste Management | NA* |
| 26. | Hospitality (Hotels etc.) | NA* |
| 27. | IT Services | NA* |
| 28. | Companies involved in Food Processing | NA* |
| 29. | Quarrying | NA* |
| 30. | Paints and Varnishes | 3208 to 3209 |
| 31. | Online Information and Data Retrieval | SAC – 99843 |
| 32. | Sheets for Veneering | 4408 |
| 33. | Particle Board, Fibre Board, Plywood | 4410 to 4412 |
| 34. | Tiles and Marble | 6802 |
| 35. | Ceramic Items | 6910 |
* Note: Wherever in the above tables ‘NA’ is mentioned against the CTA Headings, MCA may identify the code as Committee could not identify the same due to paucity of time. These sectors have been recommended on the basis of inputs received from the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance on the Cost Audit Reports with the approval of Chairman, CBDT vide CBDT OM No. 370149/168/2023-TPL, dated 25.1.2024.
6.6 A view was also expressed during deliberations that cost is an important criteria to measure the performance of a particular entity or a project. Government as a shareholder in a company or as provider of funds or moneys for infrastructure projects or subsidy would be interested in ascertaining the cost being incurred by an entity (company) where it is a shareholder or is in management or in a project/scheme where it is providing subsidy, incurring expenditure. In a company where Government has no stakes, revenue leakages could be one concern to ascertain the correctness of costs recorded in the books of a company. At the same time, management of a company ( in case of a non-govt. company, where Govt. is neither a shareholder nor in management) would also be interested in having adequate cost controls to ensure that there is a no cost overrun or leakage lest its profitability should get impacted. Corporates have to be competitive to survive in market and not to yield share of market to the rival companies. In any market structure, profit maximisation or loss minimization would be the aim of a corporates. In order to remain competitive, companies have to adopt various strategies including reduction in their cost.
6.7 Keeping in view these discussions and deliberations, the Committee felt that the report may be placed in public domain for wider consultations including with industry and user departments within the Government to get views on the recommendations of the Committee for addition or removal of sectors within the framework of cost audit and maintenance of cost records.
6.8 On the Criteria for maintenance of cost records and cost audit, the Committee felt that a single turnover criteria for cost records maintenance and as well as for cost audit may be more appropriate. Further, the committee also felt that aggregate turnover of the products and services covered under CCRA Rules is relevant for coverage of companies under cost records maintenance and cost audit whereas total turnover may not be relevant in deciding the coverage for cost records maintenance and cost audit. After detailed deliberations, the Committee decided that a single aggregate turnover of Rs. 75 crore of the products and services covered under CCRA Rules may be fixed as a criteria for coverage of the Companies for cost records maintenance as well as for cost audit.
6.9 The Committee is of the view that in order to avoid the year-to-year fluctuations in turnover limit and to keep a consistency in the maintenance of cost records and cost audit, it would be appropriate to consider the aggregate turnover of the individual product or products or service or services of any one of the immediately preceding three years as a criteria for applicability of maintenance of cost records and conduct of cost audit in the current financial year.
6.10 Therefore, the Committee recommended that the class of companies engaged in the production of the goods or providing services, as specified in the CCRA Rules, having an aggregate turnover of the product or products or service or services of rupees seventy five crore or more during any one of the immediately three preceding financial years, shall maintain cost records and conduct cost audit for such products or services.
6.11 Committee also recommended to continue the present five exemptions and it shall be applicable to maintenance of cost records as well as cost audit.
6.12 The Committee recommended to continue the existing exemption provision in the CCRA Rules with respect to the micro and small enterprises as per MSME Development Act 2006. The Committee further noted that in line with the Government’s policy to extend ease of doing business, recommendation of fixing turnover limit at Rs.75 crore, will also exempt the medium enterprises having turnover from Rs.50 crore to Rs.75 crore from the maintenance of Cost Records and Cost Audit.
7. Formats and procedures for Cost Records and Cost Audit (Chapter 7)
7.1 Regarding the formats of the Cost Audit Report, the Committee noted the existing provisions with respect to maintenance of Cost Records and Cost Audit in CCRA Rules 2014. After considering all the recommendations made by stakeholders, the Committee recommended to amend the existing formats. Some of the major decisions of the Committee regarding the formats are as follows:
a. The Unit of Measurement (UoM) for each Customs Tariff Act Heading, wherever applicable, shall be the same as provided for in the Customs Tariff Act, 1975 (51 of 1975) corresponding to that particular Customs Tariff Act Heading.
b. Cost Records may be maintained and Cost Audit Reports may be reported for every major saleable product/service of a particular CTA Code (For instance in Pharmaceuticals – under a particular CTA Code Losartan (300490073), products are 12.5 mg tablet, 25mg tablet, 50 mg tablet, 100 mg tablet etc.) Major saleable product under a particular CTA Code shall mean a product which is contributing at least 5% turnover of total turnover of all product/service covered under a particular CTA code.
c. In the present complex business environment where companies are engaged in multiple products and services, there is no need to prescribe formats for maintenance of Cost Records for each industry as this will curtail the flexibility presently given to the Companies to maintain cost records as per their need. The Committee is of the view that the principles mentioned in CRA-1 are adequate guide for maintenance of Cost Records.
d. Considering the suggestions of stakeholders, the Committee feels that separate Cost Audit formats may be required for few sectors like Health Care, Telecom, and Infrastructure etc. Thus, the Committee recommends that MCA may develop separate Cost Audit formats for these sectors in consultation with ICMAI and
the respective industries/stakeholders, keeping in view that there is no additional compliance burden on the companies.
e. Based on the suggestions received from the stakeholders, the Committee revised the existing Form CRA-3 and recommends that same may be notified by MCA in consultation with ICMAI. Revised proposed format for CRA-3 is placed at Appendix-3.
f. The Committee recommends that while filing Form CRA-4 with the Central Government, the company has to mandatorily attach a copy of the Form CRA-3 (duly signed by the Cost Auditor).
7.2 On the Procedures for Cost Records and Cost Audit, the Committee recommended to amend certain provisions of the CCRA Rules 2014 and Companies Act based on the suggestions/ comments from the stakeholders. The details of the recommendations of the Committee are in Chapter – 7. However, some of the recommendations of the Committee are given below:
(i) Reports in addition to the Cost Audit Report to be furnished by the Cost Auditor to the Board/Audit Committee (Para7.4.2): The Committee is of the view that there is no justification for reintroduction performance appraisal report or Report on Internal Cost Controls & Economic Utilization of Resources or a report on Limited Cost review Reports. However, the Committee in principally agreed that some Key Performance Parameters may be placed in the Board and Audit Committee. Accordingly, the Committee has recommended to include Key Performance Parameters which is given under observations and suggestions of Form CRA-3 attached in Appendix-3. The Committee further recommends that a statement covering these Key Performance Parameters based on unaudited data may be placed before the Board and Audit Committee by the Company on a quarterly/half-yearly basis.
(ii) Disclosure in Board report (Para7.4.4): Board report may be modified, interalia, include provision relating to cost audit as given below:
a) Whether maintenance of cost records and cost audit is applicable on the company or not;
b) If yes, then whether such accounts and records have been so made and maintained and whether cost auditor has been appointed or not.
Further, the Committee recommends that CARO certificate in respect of Section 148 (1) of Companies Act, 2013 is infructuous and amounts to duplication that is adding to the cost of compliance. Therefore, the Committee recommends deletion of this clause from the CARO report. Ministry of Corporate Affairs may examine it keeping in view the provisions of the Companies Act, 2013, after wider consultations.
(iii) Examination and review of the cost statements and cost auditor’s report to be included in the functions of Audit Committee under Section 177 of the Companies Act, 2013 (Para7 .4.5): Cost audit report is an important document which should be discussed and deliberated by the Audit Committee. This will also strengthen the corporate governance framework. The Committee noted that this would require amendment in the Act. Therefore, Ministry of Corporate Affairs may examine the Committee’s recommendation for inclusion of Cost Audit Report in the list of documents to be examined by the Audit Committee under Section 177 of the Companies Act 2013 after wider consultations.
(iv) Appointment and Rotation of Cost Auditor and Submission of Cost Audit Report (Para7.4.7):
a) Committee is of the view that appointment, removal, rotation of cost auditors and fixing a cap on maximum number of Cost Audits by the Cost Auditor may be done in line with the statutory auditors. Since this would require amendments in the Companies Act, Ministry of Corporate Affairs may decide the issue after wider consultation.
b) The method of appointment of Cost Auditors in Government companies may be examined by MCA in consultation with Department of Expenditure.
(v) Provisions relating to Remuneration of Cost Auditor (Para7.4.8): The Committee noted that there is some difference in provision relating to remuneration of the Cost Auditor in the Companies Act and in Companies (Audit and Auditors) Rules, 2014. As per Section 148 of the Companies Act 2013, remuneration of cost auditor is to be determined (and not ratified as mentioned in Companies (Audit and Auditors) Rules, 2014) by the members. Therefore, in order to avoid any ambiguity, the Committee recommends to suitably amend Companies (Audit and Auditors) Rules, 2014 and include all provisions relating to the appointment including remuneration of Cost Auditor in the CCRA Rules.
(vi) Disclosures in Annual report (Para7.4.14): Keeping in view the significance and utility of this information to the stakeholders, the Committee recommends that information relating to significant performance parameters and key cost trends may be included in the Annual Report.
(vii) Cost Accounting Standards (Para7.4.15): In order to bring uniformity in reporting of the items of cost in the Cost Records and in Cost Audit Reports, the Committee is of the view that the issue of Cost Accounting standards may be examined by the Ministry of Corporate Affairs, keeping in view the acceptance of same internationally and provisions of the Companies Act.
(viii) Confidentiality of Cost Audit Report (Para7.4.19): MCA may ensure proper data encryption, limited data access & audit trail in the system to ensure confidentiality of cost audit reports submitted by the companies.
8. Cost Accounting Records and Cost Audit in Cooperatives, Trusts, Autonomous Bodies and other Authorities (Chapter – 8)
8.1 The Committee noted that presently, maintenance of Cost Accounting Records and Cost Audit are guided by Companies Act 2013 and CCRA Rules 2014 which are applicable on the companies only. As a result, Cooperatives, Trusts, Autonomous Bodies and other Authorities remains out of the purview of the mandatory Maintenance of Cost Accounting Records and Cost Audit even though they are commercially operating in the same sectors.
8.2 The Committee noted that there are 4861 number of Autonomous Bodies (AB) set up by Government of India for a specific purpose in the field of education, health, finance, or public service etc. These AB play a crucial role in the implementation of government policies, delivery of services, and the promotion of specific activities in various sectors. AB charge user fees or charges for the services they provide which vary depending on the nature of the services offered by each AB. The dependence on government budgetary support by AB suggest that the cost of providing services is not fully covered by user charges or fees. Further, it indicates under-recovery of cost, where the revenue generated from users is insufficient to cover the total cost of delivering the services.
8.3 The Committee noted that the government budget support is essential for the functioning and development of autonomous bodies and therefore it is essential to ensure that, during the fixation of user charges, individuals with the financial means to pay are not subjected to unfairly low, subsidized rates.
8.4 Regarding cooperative sector also, the Committee noted that the provisions of Cost Audit already exist in various state cooperative acts which provides for the Cost and Performance audit of the cooperative societies by a Cost Accountant. The Committee also recommended to provide for a mandatory Cost Audit of the Cost Records of multi-state cooperative societies.
8.5 The Committee recommends that the principles and practices of maintenance of Cost Accounting Records and Cost Audit may be extended to the co-operative societies, trusts, autonomous bodies, other authorities such as public transport service providers including rail, metro and State Road Transport etc. in the Fertilizer, Sugar, Education, Health, Transport and Port services Sectors and all such sectors which are either in receipt of subsidy/incentives/grant from the Government or engaged in the activities covered under CCRA rules. This may be subject to certain thresholds in terms of quantum of subsidy or expenditure.
8.6 The Committee felt that since CCRA Rules as per Companies Act, 2013 cover only companies, Department of Expenditure, Ministry of Finance and other concerned Ministries/Departments may examine the recommendation of the Committee and decide whether these could be mandated through administrative instructions or some statutory changes.
8.7 Threshold criteria may be decided by the respective ministry/Department concerned in consultation with the Department of Expenditure, Ministry of Finance, if required.
9. Cost audit in infrastructure projects of Government (Chapter 9)
9.1 The Committee noted the status of on-going projects as on 1st January 2024 from the details made available by the Ministry of Statistics & Program Implementation (MoSPI). The time overrun and costs overrun of these projects were also noted by the Committee in detail.
9.2 The Committee recommended the following:
(i) Proper time & cost records should be maintained in all Government infrastructure projects of value of Rs.100 Crore and above (Refer Rule 141 of GFR).
(ii) Quarterly/half-yearly submission of a comprehensive report to the concerned ministry, Department, or public authority, covering activity-wise, milestonewise and element-wise examination & analysis of time and cost by an independent professional cost accountant.
(iii) The concerned ministry, Department, or public authority, if feels it necessary, may insert a suitable clause in the tender document for future projects. Accordingly, Ministry of Finance, Department of Expenditure may include it in its guidelines/instructions regarding appraisal and approval of public funded projects/ schemes.
(iv) Draft formats of reporting are placed at Appendix-4.
10. Cost Audit of Products/Services/Schemes where Government provides incentives through Production linked Incentives (PLI) (Chapter 10)
10.1 The Committee noted that PLI schemes have been implemented in 14 key specific sectors to make Indian manufacturers globally competitive, attract investment in the areas of core competency and cutting-edge technology; ensure efficiencies; create economies of scale; enhance exports and make India an integral part of the global supply chain. The impact of the PLI on the Indian economy was also discussed by the Committee.
10.2 The Committee after detailed deliberations, noted that most of the sectors presently covered under PLI are already under the ambit of Cost Audit.
10.3 Further, some of the PLI notifications also require applicants to submit a domestic value addition (DVA) certificate duly cost audited by an external auditor (Cost or Chartered Accountant). The Committee noted that such provision is already a part of PLI Application process. Further, different PLI notifications provides for different mechanisms to calculate such value addition.
10.4 The Committee is of the view that the Cost Audit reports may help in determining the figure of “actual value addition” by the beneficiary which is essentially a prerequisite for the disbursement of cash subsidy/incentives under the PLI Schemes. The Committee further noted that in some of the official notifications of PLI as released by the respective ministries/Departments, already have a provision of cost audit/ certificate by an external auditor (Cost or Chartered Accountant) appointed by that ministry and expenses of which will be met within the allocation of the scheme.
10.5 The Committee recommends that every PLI scheme may include a provision of an independent “Audit Clause” requiring Audit by an independent Auditor (Cost Accountant or Chartered Accountant) appointed by that ministry and expenses of which will be met within the allocation of the scheme.
10.6 The Committee felt that since CCRA Rules as per Companies Act, 2013 cover only companies, Department of Expenditure, Ministry of Finance and other concerned Ministries/Departments may consider the recommendation of the Committee.
11. Usefulness of cost audit reports (Chapter 11)
11.1 The Committee noted that the utility of Cost Records and Cost Audit has been well examined by various expert committees earlier also. The Committee observed and deliberated upon the suggestions of The Institute of Cost Accountants of India (‘ICMAI’), the Industry Associations, All India Cost & Management Accountants Associations and Views of Ministries/Administrators/Regulatory Bodies on Usefulness of Cost Records and Cost Audit.
11.2 The Committee noted that to improve the utility of cost data to all stakeholders, there is a need to make necessary changes in the Cost Audit Report formats, details of which are discussed separately under Chapter 7 – Formats and Procedures. The Committee is of the view that Cost audit reports are an important tool to check malpractices in inventory valuations.
11.3 To increase the usefulness of Cost Audit Reports, the Committee recommended the following:
(i) A nodal officer (Not below the rank of Joint Secretary) may be nominated by each administrative Departments/Ministry, Department of Expenditure and Regulatory Bodies to whom access (through user ID and Password) to the Cost Audit Reports relating to respective Sectors may be given by MCA. The nodal officer may analyze the Cost Audit reports of the sector related to the concerned Department/ministry and report valuable insights to the Department/ministry for policy-formulation and informed decision making.
(ii) An IT software enabling user friendly Dashboard may be developed in consultation with Cost Audit Branch of MCA to build benchmark costs of each major product(s)/service(s) per unit which may enable inter-firm comparison and better decision-making.
(iii) A proactive approach involving regular advocacy efforts tailored to the specific needs and concerns of user departments.
(iv) MCA in consultation with the Department of Expenditure may conduct a tailored training programme among the Financial Adviser of the Government of India about the usefulness of the cost audit reports.
11.4 Further, the Committee is of the view that the Committees’ recommendations in Chapters 6 to 10 of this report, on Simplification/ rationalization of the procedure, improvement in the Cost Audit Reporting formats, implementation of Cost Audit in the high value infrastructure projects, PLI and extension of the principles of cost accounting and audit to the Cooperative, Trusts and other Authorities will protect the interest of the Government in its investments and increase the usefulness of the Cost Audit Reports to the Government Departments/ Ministries/ Regulators.
12. Principles for selecting sectors for review of Cost Audit Reports on a periodic basis (Chapter 12)
The Committee is of the view that utilization of the Cost Audit Reports can be improved if some sectoral studies are conducted yearly based on Cost Audit Reports. Random review/ examination of some Cost Audit Reports will improve the quality of the reports as Cost Auditors will do more diligence in preparing Cost Audit Report if such oversight mechanism exists.
12.1 On sectoral review, Committee recommends the following broad principles for selecting sectors for review of Cost Audit Reports: –
(a) The Committee recommends that Sectoral Review may be done by the respective Administrative Ministry in consultation with Cost Audit Branch of MCA. Alternatively, in case the Administrative Ministry does not have the expertise to carry out such study, it can be a done by Cost Audit Branch, MCA in consultation with the Administrative Ministry.
(b) Every year 2-3 sectors may be taken up for review.
(c) Sectors should be taken up by rotation i.e., if a sector has been selected for review in year, then it should not be again taken up for next 2-3 years unless it is required to be taken up in public interest.
(d) While selecting a sector, following may be considered:
(i) Administrative ministry/ regulatory body for the sector concerned, may be consulted for finalizing the terms of reference of the sectoral review. (ii)
Following sectors may be given preference for sectoral review:
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- Sectors which are prone to cartelization or having larger public interest or facing financial difficulties i.e. high number of insolvencies or sectors which are having complaints of financial irregularities.
- Sectors which have seen high rise in products/service prices in short period of time or reduced availability of products/services against the demand or witnessed high imports.
12.2 On periodic review, the Committee recommends that the following factors may be considered while selecting Cost Audit Reports for periodic review: –
(a) Cost Audit reports of a financial year, on sample basis, selected through computerized system, may be taken up for review.
(b) Reports selected may cover at least 1/3rd of sectors covered under Cost Audit.
(c) All the sectors should be taken up for review by rotation.
