Madhya Pradesh has decided to shift its financial year to align it with the Gregorian calendar year — that is, January 1 to December 31.
At present, the Financial Year runs from April 1 to March 31.
Recently, in one of the meetings of the Niti Ayog, the Prime Minister had proposed the same idea to the Chief Minister of the States.
History of the present system of Financial Year in India
The “Budget System” in India has a history of more than 150 years. It was first introduced on 7th April 1860, two years after the transfer of Indian administration from East-India Company to the British Crown.
The present financial year in India (1st April to 31st March) was adopted by the Government of India in 1867 principally to align the Indian financial year with that of the British government.
Prior to 1867, the financial year in India used to commence on 1st May of the current year to 30th April of the following calendar year.
Since then, the appropriateness of this practice has been questioned at various points of time throughout its 150 year history.
After independence, the most comprehensive attempt to examine this matter was made when the Government of India set up a committee on change in financial year under the chairmanship of Shri L. K. Jha in 1984.
Recently, the Centre had appointed a committee under former Chief Economic Adviser Shankar Acharya on the desirability and feasibility of changing the fiscal year in line with the calendar year. Its recommendations are still not in the public domain.
Arguments for aligning the financial year with the Gregorian calendar year
- The financial year April – March was adopted to ensure alignment of the Indian financial year with that of the British and that local/national considerations did not really drive the above decision.
- Under the current system, the Government is not able to account for the impact of monsoon rains while finalizing and presenting the Budget and formulating the budgetary investments and allocations.
- The current financial year leads to sub-optimal utilisation of working season – typically believed to spread from October till June (around 9 months) with the period between July-September being the monsoon season.
- Aligning the fiscal year to the Gregorian calendar will also align it with the practice in most countries as well as multilateral agencies.
The committee on change in financial year chaired by Shri L. K. Jha examined this matter in a comprehensive manner in mid-1980s. The committee finally recommended changing the financial year to the calendar year.
Government of India examined their recommendations and outlined the following arguments for maintaining the status-quo:
- The advantages arising out of the change would only be marginal in view of the innumerable considerations in the formulation of budget policies
- Change in the financial year would upset the collection of data and it might take a long time to return to normalcy in this regard
- The change would create a large number of problems, as extensive amendments to tax laws and systems, financial procedures relating to expenditure authorization and other matters would become necessary.
The Gregorian calendar year is used by about 70 percent of IMF member countries; the end dates of the 1st, 2nd, and 3rd quarters of the calendar year are used by most other countries. A few use a religious calendar. Examples include:
- 1 January – 31 December. All Latin American countries, Francophone Africa, most European countries and many South East Asian countries.
- 1 April – 31 March. Many countries with historical ties to the United Kingdom follow this calendar, including Brunei, Canada, India, Singapore, South Africa, as well as the U.K. itself.
- 1 July – 30 June. Australia, Egypt, Kenya, New Zealand, Pakistan, Tanzania, and many countries from the southern hemisphere.
- 1 October – 30 September. United States (federal government), Thailand, Trinidad and Tobago, and Laos.
- Religious New Years. Countries such as Iran and Afghanistan use 21 March – 20 March.
The idea is not new and has been floated a few times. Yet, the M.P. government’s move is abrupt as there was no hint of this plan when it presented its 2017-18 Budget recently.
As a result of this decision, the next State Budget will be presented in December or January, but the State’s transition plan for the changeover is not clear.
The Union Budget was shifted from February 28 to February 1 this year, to ensure that funds are available with ministries from the first day of the financial year. Thus, States such as M.P. may start 2018 will have to wait till February for clarity on the Union Government’s priorities for the coming year and till April for Central funds.
Going forward with different financial years in the States while taking no action at the Centre would be chaotic. It will add problems for firms adapting to the Goods and Services Tax regime that will be introduced in the middle of this financial year.
Additional uncertainties and differing tax deadlines for States are also likely to confuse investors.
In conclusion, a fiscal year readjustment cannot be left to the States alone. The Centre must make the Shankar Acharya panel report public, and clarify its own road map so that States and taxpayers may align with it.