Prime Minister Narendra Modi has suggested shifting the financial year from April-March to January-December. If India adopts the calendar year (Jan- Dec) as the new financial year, it would mean that everyone will be required to follow the new accounting period, which will begin from 1st Jan and end on 31st December (this will be in line with common international practice).
We take a look at what this change would mean:
The government follows financial year for budgeting its finances on annual basis. A financial year is a period of 12 months, starting on a chosen date which ends after 12 months. This is generally used for estimating and analyzing the financial situation of governments. Government of India draws its financial situation through the Union Budget and it reflects period starting 1st April of a given year and ending 31st March of the next year.
The financial year April – March was adopted to align the Indian financial year with that of the British in pre independence era and local/national factors were not considered at all in the above decision. The validity of the Indian Financial Year (1st April to 31st March) has been questioned and examined many times.
The most important consideration behind such examination has been the fact that the government is not able to account for the impact of monsoon rains while finalising and presenting the Budget. The Union Budget is a critical tool for any government for implementing the economic and social policies. The current financial year has lots of limitations on the economic and investment planning for government.
Other important considerations often cited include aspects such as:
a) current financial year leads to sub-optimal utilization of working season – typically believed to spread from October till June (around 9 months) with the period between July-September being the monsoon season;
b) difference in agriculture crop period, statistics and data collection periods from the point of view of national accounts;
c) convenience of legislators;
d) international practices;
e) national culture/traditions etc.
What it means for the common man?
The new suggested financial year period of Jan-Dec would mean that all the income and expenses will be accounted over the calendar year and the taxpayers will be required to file the tax returns for the calendar year. But whenever the government first decides to switch to new regime it would mean that the first financial year under the new regime will be either shorter or longer than 12 months.
This can also pose certain questions as to what will be the period of first (new) financial year, what will be the tax slab in case if it is shorter/ longer than 12 months, what will happen to certain investment linked deduction for which the due dates falls between Jan – March (Ex. if you have an insurance premium due on 25th March 2018 and government declares that the first financial year will be 1st April 2017- to 31st December 2017 in this case you will not be able to claim the deduction). Taxpayer may have to review their investment schedule to optimize the tax impact. On the contrary, if the first financial year is shorter or longer than 12 months it can even impact the tax effective tax rates for you because of different slab rates and surcharge applicability based on the level of income.
For big MNCs – who are required to prepare two different sets of account this can be beneficial as they will no more be required to go through the hassle of preparing two sets of account and allocating its income over two different accounting cycle.
For the internationally mobile tax payers who are required to report their global income in the country of their residence, this change will mean that there will be no delay in return filing in either of the country as the accounting year of both the country may match with each other (As many country follows the calendar year as their financial year) and the calculation of taxable income and related taxes will become very easy and fast.
Will it be beneficial and how?
As any change causes some initial hiccups this change will also pose many challenges at the beginning. But whether this move will be beneficial or not for a common man depends on various factors and it will be difficult to gauge the impact immediately unless we have exact details in-front of us. But this will surely help the government in better management and allocation of scare resources to its optimal use which in turn will help the common man.
The author is Head of Tax research, H&R Block India