The government of India is planning to align the financial year with the calendar year. Discuss the rationale for such aproposed change and the challenges associated with it.

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The government of India is planning to align the financial year with the calendar year. Discuss the rationale for such aproposed change and the challenges associated with it.

Approach:

  • Introduction with the current financial year, and the proposal for change
  • Discuss the benefits associated with it.
  • Mention few challenges associated with it
  • Conclude appropriately
Model Answer :
India follows April-March financial year, which is same as United Kingdom’s fiscal year. It was adopted in 1867 principally to align the Indian financial year with that of the British government. About 150 nations follow January-December as their financial year. Another 33, including India, follow April to March.
However, the government is planning to shift to a January-December financial year. The 1st ARC ( Administrative Reforms Commission) has recommended it way back in 1967. Recently, the central government constituted a committee under former chief economic advisor Shankar Acharya to examine the desirability and feasibility of having a new financial year. The report is yet to be made public.
Rational for such change:
  • In case of a drought, which happens between June and September, a change in the accounting period from January to December will help in better budgeting to help handle the crisis. If the Union budget is presented in November, then early allocations will help the agro-economy and farmers.
  • This shift will align India with the fiscal year followed by most developed countries worldwide. With an increasing number of global companies engaging in business activities with Indian companies, the integration of the Indian economy with the global economy will become convenient and there will be standardisation and uniformity in reporting.
  • A NITI Aayog note had also said that a change in the financial year was required as the current system leads to sub-optimal utilisation of working season.  The financial year is not aligned with international practices and it impacted data collection and dissemination from the perspective of national accounts.
  • Comparison of macro data with other countries will also be much simpler as many multi-lateral agencies such as the IMF and the World Bank give projections for the calendar year.
Challenges in bringing this change:
  • The change in financial year would mean changes in book-keeping, HR practices, accounting software, and taxation system, involving huge costs for big and small industries.
  • Companies will be required to finish the current accounting year in nine months’ accounts before moving to the calendar year, which will require lots of cut-off procedures to be advanced, like reconciliation of books of accounts, transfer pricing study etc.
  • If this change happens, the government would have to amend a number of laws, which includes Income Tax (I-T) Act, Companies Act etc. For example, Section 2 (41) of Companies Act, 2013 made it mandatory for companies to follow an April-March financial year.
  • It would also have to rework the Centre’s balance sheet, start a new assessment year for taxes.
  • After implementing GST (Goods and Service Tax) on July 1 and last year’s surprise demonetisation move, a change in fiscal year could further add to the confusion for the India Inc.
Conclusion:
Implementation of change in financial year should be well planned to prevent any disruptions. It might be better to put off the changeover until companies have settled down with the GST laws and new accounting standards. The change will add to the transition costs but long-term benefits of the move may help to deal with this. Recently, Madhya Pradesh became the first state to switch to the January-December financial year. Other States may follow.