Change in financial year will help align India with the prevailing practices which are followed by most of the developed countries.
By Amar Pandit
A financial year typically refers to a 12-month period used for accounting and tax purposes. Currently, in India the financial year followed is from 1st April of a given year to 31st March of the next year. Prime Minister Narendra Modi had some time back proposed to change this financial year period from January to December, hence making the financial year and calendar year the same.
This means the next Budget, to be presented on February 1, 2018, will most likely be only for nine months, after which a full Budget will be presented for the year 2019 in the beginning of January.
On a macro level, there are various pros and cons of shifting the financial year.
Let’s have a look at the pros…
Currently, 156 countries follow January to December financial year and only 33 countries follow April to March financial year. Hence, change in financial year will help align India with the prevailing practices which are followed by most of the developed countries. This change would also facilitate better data collection and comparison, with the rest of the world.
This move will also benefit the MNC firms in India, as they will not have to prepare different sets of accounts for different accounting cycles. It will be easier for the companies to consolidate their data and report to their respective parent companies.
This change will also help the government to include monsoon forecast in their budget preparations, as this will align the financial year with the crucial monsoon cycle. Also, this will help in better allocation of resources to the agricultural sector, based on the quality of monsoon in that particular year.
However, this will be a big structural reform and may have some cons as well…
Firstly, it will lead to many other changes such as shifting Parliamentary Sessions, budget presentation in November-December, reorganizing tax infrastructure and laws, tax assessment year which could lead to confusion.
Secondly, these changes will not only affect the government, but also various companies, businesses and individuals. With the entire infrastructure of accounting software and taxation systems changing, there could be a huge one-time cost for both big and small companies.
Just like the recent demonetization & GST implementations, changing the financial year may also create a little uncertainty. Hence, this move needs to be well planned and executed to avoid any disruptions in the economy.
For the common man and retail investors, there will not be a major impact.
However, they should be aware of the following….
Taxation Period: The taxation period will change from the current April to March cycle to a new 12-month period i.e. January to December.
Tax Planning: Retail investors may be confused regarding tax planning for the first year of this change.
Many investors are accustomed to making their tax-saving investments in the month of March, to get tax benefit for that financial year. Now, all investors will have to plan their tax saving investments and schedule them according to the new financial year.
We recommend planning your taxes well in advance, and making tax saving investments in the beginning of the year itself.
For international tax payers, the accounting period in India may match with their country’s accounting period. Hence tax planning and reporting will be much simpler for them.
Hence, we can conclude that there will be challenges in the beginning for the government as well as the common man. However, eventually it will help the government in better management and allocation of resources, which in turn will help the common man.
(The author is CFA and Founder & Chief Happiness Officer at HappynessFactory.in)