.jpg?downsize=773:435 "Madhya Pradesh Heeds Modi’s Advice. But Does India Need A New Financial Year?")
The Madhya Pradesh government on Tuesday decided to move its financial year from an April-March year to a January-December year. The decision followed an April 23 meeting of the NITI Aayog, where the Prime Minister brought up the issue. According to a PTI report on the day, the Prime Minister asked states to take the initiative in this regard and said that a January-December financial year would be better suited to the agricultural cycle in India.
The idea of a shift in the financial year has now been debated by a handful of committees and experts. Most recently, a panel headed by Shankar Acharya, former chief economic adviser to the government, examined the issue and submitted its report to the government in December. That report has not been made public. Others have publicly supported such a shift. For instance, the Parliamentary Standing Committee on Finance, chaired by Congress member of parliament M Veerappa Moily, in March said that such a shift is justified, according to a PTI report.
In 2016, Bibek Debroy and Kishore Desai of the NITI Aayog put out a discussion paper on the possible shift to a January-December financial year, which highlighted the impact this would have on the budget, the working season and economic statistics.
Impact Of The Financial Year On Budget
One of the key factors cited by Debroy and Desai was the mismatch between the monsoon season and the government spending cycle. By the time the government authorises fresh allocations, the impact of the previous year's south-west monsoon is over and by the time allocations reach the implementing authorities, another cycle of the south-west monsoon is about to set in. This makes the budgetary policy measures more “reactive” rather than “proactive”, said the paper.
The paper quotes from a previous committee headed by LK Jha as far back as 1984, which had also argued in favour of a change in the financial year to January-December.
...If the post-monsoon period in the financial year was made as short as possible, the major part of the financial year would be subject to the effects of the monsoon in the preceding year, the impact of which could be adequately taken into account in the budget preparation, while the impact of the uncertain monsoon yet to arrive would be restricted to the minimum.Committee On Change In Financial Year Chaired By LK Jha (1984)
Debroy and Desai go on to conclude that the current financial year seriously limits the government's ability to account for uncertain monsoons. “A change in financial year will therefore be a crucial structural reform to re-orient the government's budgetary interventions and resource allocations,” said the paper.
Mukesh Butani, chairman of BMR Legal, disagrees and told BloombergQuint in an emailed response that he sees little reason to change the financial year.
With the Indian economy becoming relatively much less dependent on monsoons and the services sector increasingly dominating, any need for change in the budget year based on historical agrarian factors which may have been significant a decade ago, may not be relevant now.Mukesh Butani, Chairman, BMR Legal
Matching The Financial Year To The Working Season
Debroy and Desai define the “working season” in India as the period starting October stretching over to the next eight or nine months. This is essentially the period between the onset of monsoons. Given that, a financial year which stretches from April-March leads to “suboptimal utilization” of the first two quarters of the financial year, said their paper.
Though the paper argued in favour of a shift, it acknowledged that the system has currently found ways around the mismatch.
“While, a few decades back, the timing of the financial year could have actually led to sub-optimal utilization of the working season, the above issue may not be that relevant in the present context,” said the paper.
Still, it added that it may not be difficult for the government to change the financial year if it wanted to match this more closely with the working season.
Statistics And The Financial Year
Debroy and Desai also laid out an argument for a change in the financial year based on statistics.
Of the 35 important basic statistical series, around 11 are compiled on a calendar year basis and 22 are based on the financial year, said the paper. For instance, data for agriculture follows the crop year, typically taken as July-June. Statistics related to co-operative societies are also collected on an agriculture year basis.
But this in itself may not justify a shift in the financial year. The paper notes that while the Central Statistical Organisation (CSO) acknowledges the “difficulties in synchronizing statistics of all sectors with the existing financial year”, it does not believe that this hampers the quality or efficacy of data.
The paper concludes that it may be difficult to completely eliminate the differences in data collection no matter what the financial year. Given that, the paper was neutral on such a shift from the point of view of statistics and said that if the year is shifted, the CSO should not have much trouble aligning itself accordingly.
Tough But Not Impossible
Extensive changes to the Constitution and to several laws would be needed to bring a new financial year into effect, Debroy and Desai acknowledged in their paper. They pointed out that while the Constitution “does not explicitly define the start and end dates of the financial year,” Article 367(1) says the General Clauses Act, 1897 shall apply to the interpretation of the Constitution, and this Act defines the financial year to be one “commencing on the first day of April”.
The paper also lists changes in tax laws, Companies Act, 2013, accounting rules and statistical practices as necessary to change the financial year.
But it still feels it can be done.
Leaning, once again, on the Jha committee, Debroy and Desai said that such a change has taken place in a number of countries. The U.S., Canada and Pakistan to name a few.
It can be done but it won't be easy if the accounting year for businesses is also changed, said PR Ramesh, chairman of Deloitte India.
Any change in fiscal year is likely to have a significant impact in the transition year, said Ramesh in an emailed response to BloombergQuint. This is because often expenses and collections of revenue are significant towards the fiscal year end in order to meet planned targets or utilize budget outlays.
Businesses too see a spurt in orders from government and collections of outstanding dues towards the fiscal year end. In a transition to a new fiscal year, there would be a truncated fiscal year initially which will distort fiscal reporting as also disrupt tax collections and leave unutilised budgets as collections and expenses are not evenly spread in any fiscal year.PR Ramesh, Chairman, Deloitte India
Butani of BMR Legal adds that even if it is decided that there should be a change in the (government's) budget year, there should be no change made to the tax year and accounting year. Both these should be kept as they are (i.e. April-March) for the ease of doing business.
“As regards the tax year, there is no imperative to keep it aligned with the budget year, which was also the situation in India till FY1987-88 as mentioned above. Even internationally, countries such as the U.S. and U.K. allow a tax year which is different from their budget year.”
Also Read: Adjusting The Calendar, Financially
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