Prime Minister, Narendra Modi, having a legacy of bombarding the citizens with unprecedented announcements, this time has raised quite a valid and widely discussed issue, that of changing the financial year to January 1st– December 31st from April 1st – March 31st.
The present financial year in India (April 1st to March 31st) 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 May 1st of the current year to April 30th of the following calendar year.
Since then, the appropriateness of this practice has been questioned at various points of time throughout it’s 150 year history. Though it is an extremely well thought out decision, it still poses the challenge of high administrative costs and feasibility in the short run. The change to January-December financial year would mean shifting the tax assessment year and changes in the infrastructure, especially at the company level. This may also mean advancing the budget day to sometime before January.
A major consideration driving this suggestion was that the financial year timing did not allow the Government to account for the impact of monsoon rains while allocating scarce budgetary resources. Given the timing of the existing financial year, the Government ends up formulating its Budget without reliable information about monsoon rains that significantly impacts the agriculture sector and the rural economy, in particular, and the overall economy and budgetary policy, in general. This limitation significantly impacted the investment planning outputs of the budget.
Other key considerations often cited included factors such as:
a) The current financial year led to sub-optimal utilization of working season:
The working season in India is typically considered as the period starting in October stretching over to the next 8 or 9 months (i.e. June/July). For ongoing development works, allocation lapses at the end of the financial year i.e. March 31st. Usually, the Appropriation (Main) Bill is approved by the 1st week of May and hence fresh sanctions/allocations reach the executing authorities sometime by end of May or first week of June. This process essentially creates a time-lag of about a quarter from the date the allocation lapse.
b) The current financial year cycle was chosen without any reference to national culture and traditions or convenience of legislators;
c) The financial year is not aligned with international practices and this impacted data collection and dissemination from the perspective of national accounts etc.
As quite expected, there have been major criticisms and doubts regarding this speculated change. It is quite natural for people to try finding out the ‘worthiness’ of the trouble they’ll have to go through to make administrative changes in their business. A transition period has also been suggested to make this process of change smoother, if it happens.
While making the decision of adopting the calendar year, it would be necessary to make changes in the taxation laws, and also in statistical data compilation besides the various financial procedures relating to the issue of expenditure authorization and other matters. The transition will, therefore, require careful planning and working out of details of implementation to ensure that there is no dislocation of work.
Another major objection to January-December being made the financial year is that it would result in poor utilization of the working season, thus not exactly helping with the limitation cited for the current financial year.
However, the most raised question has been that “Why fix something which ain’t broken?”
It is true that the existing system has worked fine along its history of more than 150 years but the essential point that is being missed is that a change of financial year is an opportunity to structurally reform the system. Such a change could potentially re-orient the budget formulation exercise thereby leading to superior performance outputs.
As is the case with structural reforms, this change is also likely to result in short-term pains and dislocations. However, such short term pains and dislocations should not matter considering the long term transformative advantages of this historical change.
About the Author:
Constantly shifting from super energetic to unimaginably lazy while watching Sherlock episodes all day. I’m an enthusiast for good food, great music, enthralling conversations and of course, beautiful literature. Trying to make a difference, one word and one place at a time.