In a move expected to check unfair trade practices, companies engaged in public-facing businesses like healthcare, education and construction will now have to follow a strict audit regime for their expenses as well as the cost of products and services provided by them.
The new cost audit rules would also apply to a range of other businesses such as drugs and pharma, medical devices, telecom services, power, roads and infrastructure, sugar, fertilisers, petro products, defence products and services, railways, aeronautical services, steel, edible oil, metals and minerals, as also multi-product or multi-service companies.
Within the healthcare space, the new rules would apply to companies engaged in running hospitals, diagnostic centres, clinical centres or test laboratories, among others.
The new rules, which came into effect yesterday as part of the new Companies Act, would also apply to companies engaged in education services, other than services falling under philanthropy or as part of social spending without forming part of any business.
These rules would be applicable broadly to four classes of companies including those engaged in the production of goods in strategic sectors such as machinery and mechanical appliances used in defence.
Entities engaged in an industry regulated by a sectoral regulator or a Central government ministry would also be covered. Besides companies operating in areas involving public interest such as railways and firms that are into production, import and supply or trading of certain medical devices would have to maintain cost records.
“The new rules specify four classes of companies which shall be required to maintain cost records and who will be subject to cost audit,” the Corporate Affairs Ministry said.
The latest notification pertains to Companies (Cost Records and Audit) Rules, 2014 under section 148 of the Companies Act, 2013.
Within the four classes, there are different thresholds for deciding the applicability of maintaining cost records.
For entities coming under the classification of being regulated by sectoral watchdogs as well as those engaged in businesses that involve public interest, the thresholds are similar.
Firms engaged in one specific product or service would have to follow the audit rules in case their networth is Rs 150 crore or more or have a turnover of Rs 25 crore or more.
“…in the case of a multi-product or a multi services company (a company producing more than one product or service), any product or a service for which the individual turnover (from such specific product or such specific service) is rupees fifty crore or more,” the ministry said in the notification.
With regard to companies operating in strategic sectors such as defence, those having a net worth of at least Rs 500 crore or having a turnover of Rs 500 crore or more would have to carry out cost audits.
As per the ministry, the threshold for cost audit is different for entities engaged in medical devices business depending on the number of products they sell.
Cost audit rules would be applicable in case company engaged in multiple products, any product or device has an individual turnover of at least Rs 10 crore, or one third of the turnover, whichever is less.
“…in the case of a company engaged in one specific product or device, if it has net worth of Rs 150 crore or more or the turnover is Rs 25 crore or more,” would also have to follow cost audit norms, according to the ministry.
It said the cost records would have to be maintained on regular basis in such manner as to facilitate calculation of per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half-yearly or annual basis.
“The cost records shall be maintained in such manner so as to enable the company to exercise, as far as possible, control over the various operations and costs to achieve optimum economies in utilisation of resources and these records shall also provide necessary data which is required to be furnished under these rules,” it said.
With respect to companies engaged in the production, import and trading of certain medical devices, the cost audit rules would be applicable even to foreign entities. However, overseas companies having only liaison offices are exempted.
As many as 20 medical devices have been identified under the rules. These include Cardiac Stents, Catheters, Heart Valves, Orthopaedic Implants, Spinal Implants and Pacemaker.
To comply with the latest norms, companies would have to appoint a cost auditor within 180 days (about 6 months) of the commencement of a financial year and the same should be informed to the Ministry within 30 days of making the appointment.
“Every cost auditor appointed as such shall continue in such capacity till the expiry of 180 days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed,” the rules said.
Companies would also have to furnish the report with the government within 30 days of its receipt. Meanwhile, the requirement for cost audit would not be applicable to a company whose revenue from exports, in foreign exchange, exceeds 75 per cent of its total revenue.
Besides, firms operating in a special economic zone are also exempted from following the cost audit norms.