We are used to the idea that a financial year begins from 1st April and ends on 31st March of the subsequent year. And that’s why fascination grips us the first time we hear of a country or a company following some other 12 month period as their FY. While most of us are busy fussing over GST and what it shall bring; a quiet storm has been brewing in government offices about a possible change in India’s financial year.
It is hardly known that India used to follow a financial year that commenced on 1st May and ended on 30th April. The current financial year was formally adopted in 1867. It was the same as what Britain followed. But throughout its 150 year history, financial year has been a matter of much debate. Several governments have toyed with the idea of changing it, but have met with political dissidence or general disdain.
Drivers to change
Starting this year, the finance ministry has decided to present the budget on 1st February as opposed to the last day of February followed earlier. This the government says will allow them sufficient time to disburse funds starting 1st April, which was often delayed to May. So the government has been pushing itself on timelines for disbursement of planned expenditure. Timely allocation helps keep agricultural produce on track. And when funds are allocated timely, its impact can be seen within the same financial year.
- A lot of plan decisions and fund allocations are dependent upon performance of agricultural.
- In spite of our strides in industry, ours is still an agricultural driven economy.
- When there is abundant crop, there is increase in rural income.
- An increase in rural income drives increase in demand for industrial goods, utilities, transport, FMCG, and increased savings
- Also leading to an increase in demand for agricultural equipment, farm machinery and fertilizers
- Giving the overall economy a positive spurt
- Agriculture continues to be India’s largest employer, engaging about 50% of our workforce
- Agricultural also influences borrowings at banks
- And causes a vicious growth cycle in the economy
Therefore, agricultural produce, monsoons, statistics related to crop production, hold an unbeatable place as both a political tool and an economic influencer. The current financial year and the budgetary process is put together without reasonable estimates of monsoon rains for the coming financial year.
A vast majority of countries have adopted the calendar year as their financial year. For some countries this coincides with the Christmas holiday season. But not all countries have documented reasons for choosing their years. Top 50 American companies in the Fortune 500 list also follow calendar year as their financial year. It seems calendar year is a more widely followed choice of financial year.
What should be India’s new financial year?
- Should it be Diwali? A lot of businesses open a customary new bahi khata on Diwali. At this time business is buoyant and there is increased consumption and expenditure. Seems like the perfect time to end a financial year! But the only issue with keeping Diwali as the start of a financial year is that it never falls on the same date. Since date of Diwali is decided as per hindu calendar. A financial year must begin on a fixed date every year for consistency.
- Should it be Oct-Sep or Nov-Oct? By this time most of India would have gone through its monsoons and it seems like a good period to bunch annual activity.
- Should it be Jan-Dec? The government may settle on this choice as it seems to be favoured internationally.
How does a change in financial year impact you?
Any change in financial year will call for a transitional period, or a transitional financial year, which may be a shorter period than 12 months. For example, if financial year is changed from 1st January 2018, then the period between 1st April 2017 to 31st December 2017 may be considered as the transitional financial year. Individuals will have to realign their savings and taxes according to the new year. While businesses will have to change their accounting and reporting.
In our view, the government should postpone any change to financial year for at least 3 years. Allowing enough time for businesses to fully absorb and adopt what GST has in store.