Aligning financial year with the Gregorian calendar

Reference news

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.
Challenges

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.
International practices

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.
Comment

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.