There have been conflicting news reports that the phosphatic and potassic fertilisers, that are partially decontrolled, could be brought back under complete control. The recommendations of the Hanumantha Rao committee have met with stiff opposition from the industry. Thus, even without a plan of how to go about with the decontrolling process in the fertiliser sector, the Government is setting up a committee on how the sector should perform in a deregulated environment.

The ground reality is that the Government is in no state to completely decontrol the sector. Currently, both the controlled (urea) and decontrolled fertilisers (potassic and phosphatic), are heavily subsidised. In a decontrolled era, these subsidies will have to be withdrawn. This means prices of these fertilisers will shoot up as had been the case in 1992 for potassic and phosphatic fertiliser when they were decontrolled. The result of the rising prices was that the Government had to intervene in the form of ad-hoc subsidies for the nutrients, thus defeating the purpose of decontrol.

It may be further recalled that a Re 1 a kg price hike in urea in the previous budget had resulted in one of the coalition partners at the Centre withdrawing. In the Budget before that, a 10 per cent hike in urea was immediately rolled back. Thus, it has historically been seen that allowing fertiliser prices to increase even marginally is not an easy task. In case the Government were to actually decontrol the sector and let the prices be market determined, prices of almost all the nutrients would double.

If the framework of the authority is taken as a hint of what the Government means by decontrolling the sector, then the point that comes out is that only a price decontrol is being considered. The Centre will have a final say on the marketing regions as well as on the sanctioning of natural gas to the fertiliser units as is the case currently. This makes little sense.

Though pricing is a major issue, allotting regions for marketing will mean restricting growth. If an area is allotted to a company or a group of companies, pricing of fertilisers will be totally at their mercy. In order to prevent this the centre will again need to monitor prices so that they are more or less uniform throughout the country. This brings us back to a controlled scenario.

Transparent accounting
According to reports, listed companies will be required to highlight the qualifications by auditors and the management's reply to these in a box format in the annual report. Prima facie, it sounds a good development but one thing that needs to be noted is that the DCA initiative has come a bit too late. All government companies (central as well as state PSUs) reply to the CAG's qualifications in a similar manner and one fails to understand as to why it took the DCA or SEBI so long to realise that the same can be made mandatory for other listed companies.

What will be the impact of the initiative? Very marginal as it would result in just a change in the mode of presentation. Serious investors inevitably go through the auditors report and work out PAT net of qualification(s). The investors who do not wish to take this trouble or do not know enough to do so, are in any case safer investing in a mutual fund. The next initiate that may be taken is that a loss making company won't be allowed to show losses on the asset side of their balance sheets. India needs to implement US model where management has to have a very convincing reason to permit SEC to allow qualified accounts. They are generally forced to re-write accounts as a result of which qualifications are very rare.

In fact, a useful reference could be the notes to the consolidated financial statements of Intel Corporation for 1998 (BCA Journal-September 1999) which run into almost 15 pages. The normal size of the entire annual report of Indian companies (including MNCs) is 30 pages and that includes subsidiaries accounts as well. Considering that our standards are not as stringent and on some of the most vital issues (deferred tax, consolidation of accounts, segment-wise reporting, leasing) no standards exist at all, it should not be too difficult.

In another interesting development, the Finance Ministry has instructed all Commissioner Income-Tax (CITs) to maintain registers showing the tax audit report done, the name and number of the auditor and description of irregularity, if any in the audit report.

This development has to be viewed in the light of revised Form 3CD which is applicable for any tax audit report submitted after June 4, 1999. Sec 44AB of the Income-tax Act requires every assessee engaged in any business and having turnover or gross receipts above Rs 0.40 crore (for the individual - Rs 0.1 crore) to get the accounts audited and submit the tax audit report before the due date of filing the return u/s 139(1) (November 30 for the corporates).

Form 3CD requires certain information to be furnished for corporate and non corporate entities carrying business. The old Form 3CD had 13 clauses requiring particulars of almost 50 items and the revised form has 26 clauses requiring information of above 100 items. In certain cases, auditors are required to express the opinion as to whether a particular deduction(s) will be admissible or not. Not only that, the computation of unabsorbed depreciation, brought forward losses, allowable depreciation, Chapter VI-A items (which includes 26 sections including Sec 80-IA, 80-IB, 80HHC, 80HHD among others) will also have to be done.

Inclusion of Chapter-VIA will create serious problems. It will not only require information under each of the sections but for computation of total income a view will also have to be expressed as to whether particular expenditure is allowable or particular income deductible. There are pre-conditions before benefit under any of these sections can be availed of.

The total deduction under Ch. VI-A can not exceed gross total income (Sec 80-A(2). However tax audit report deals only with Income from Business or profession but now income form other heads will also be subject to audit.

Computation of depreciation is going to be another problem area particularly on issue of rate of depreciation and what constitutes continuous process plant? New Clause 16(a) requires information about any sum paid to an employee as bonus or commission for services rendered, whether such sum was otherwise payable to him as profits or dividends u/s36(ii). How to do this is understandably left to the auditors.

Another interesting thing is that details of any violation of Accounting Standards prescribed under Sec 145 need to be given. Since CBDT has so far prescribed only two standards, the scope will restricted to these standards only. An area of conflict will be Clause 22 (a) of Form 3CD. It requires information about MODVAT credit availed/utilised and the treatment in revenue account along with the treatment of unutilised Modvat credit. The Guidance Note of ICAI on Tax Audits and Sec 145 A of the Income-Tax Act which deals with valuation of inventory prescribe exactly the opposite methods. ICAI has prescribed that any deviation from the guidance note should be qualified by the auditors.

Emcee (with contributions from Shishir Asthana & Urmik Chhaya)