NEW DELHI, May 14: The proposal of the draft companies bill to make cost audit voluntary could lead to evasion of excise duty and income tax besides making easy cartelisation and predatory pricing by companies.

Financial jugglery by companies to manipulate valuation of inventories would become easy in absence of a cost audit report, say industry sources.

``Wherever excise duty is ad-valorem, inventory valuation can be manipulated to evade the duty. Undervaluation of inventories also has a direct impact on income tax assessment,'' a senior executive of a Rs 1000-crore Delhi-based company said.

Cartelisation by companies operating in the same industry would also be difficult to prove in the absence of cost audit reports. ``The only way to expose a cartel in prices is through cost audit,'' sources in the Department of Company Affairs (DCA) admit.

The existing Companies Act requires companies, falling under a prescribed classification such as vanaspati, soap, batteries, essential pharmaceutical drugs, to have a cost audit done every year. The government has powers to direct a company to reduce its costs in case the cost audit report throws up such a need.

Sources in DCA said that the Bureau of Industrial Cost and Prices (BICP) has also expressed fear on the adverse fallout which the absence of cost audits could have in future.

Predatory pricing by companies could also go unchecked. Since companies indulging in predatory pricing sell their products at prices below their cost price to weed out competition, a cost audit was the only way to expose it.

Though the central government has retained the powers to appoint a cost auditor even while making cost audit voluntary, the format and the time of such an audit has been left to the company. At present, cost audit report rules are prescribed under Section 233 of the Companies Act, .

Industry sources said that companies, specially in cases where brought forward losses were large, also indulged in inflating the value of inventories. Inventories are also beefed up at the time of raising funds from banks and financial institutions and the most convenient way to have a check on such practices was through cost audits.

A section of the industry has, however, opposed mandatory cost audit on the ground that the cost audit reports are often leaked out to competitors. Since costing of the product is the most important aspect of fixing the selling price, most companies do not like to share this secret with any outside agency.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.