The government has constituted a committee to advise it on whether the current Indian financial year (April to March) needs to be changed. The committee may advise the continuation of the current period or a change to another period (like the calendar year of January to December). The primary consequence of such a change would be in the April to March period which the central and state governments use for their budgets (budget year). The committee has been enjoined to study the suitability of the financial year from the point of view of statistics and data collection, tax systems and procedures, impact on business, correct estimation of revenues and expenditures, convenience of the legislatures, effect of different crop periods, etc.
However, one of the terms of reference drawn up for the committee is to also advise, in case it recommends a change in the government’s financial year, the modalities for effecting it, including the changes required in the tax laws during the transitional period. This term of reference seems to assume that the ‘tax year’ (which is currently April to March under the income tax, excise, service tax and state VAT statutes) would automatically need to be aligned to the government’s new budget year. This misses the point that it is much more important today for the tax year to be aligned to the annual reporting period (April to March) under commercial laws (accounting year), such as the Companies Act and the Limited Liability Partnership Act rather than an alignment with the budget year.
It would be useful to trace the evolution to a uniform tax year in the Income-Tax (I-T) Act and the alignment of this uniform tax year with a uniform accounting year under the Companies Act and Limited Liability Partnership Act. For income-tax purposes, till financial year 1987-88, the I-T Act allowed a business to choose any annual period as its tax year. A business was also allowed to have different tax years for its different sources of income. The I-T Act was amended to mandate, from April 1988 onwards, a uniform tax year (April to March) for all businesses for all their sources of income. This brought consistency in taxation of income of all businesses and streamlined the tax reporting, tax accounting, and tax audit and tax systems computerisation process. Under the erstwhile Companies Act of 1956, a company could follow any period as its accounting year for which a profit and loss account had been laid in the company’s annual general meeting. Most companies chose to follow April-March as their accounting year (in line with the tax year). A small number of companies (belonging to multinational groups) followed an accounting year of January to December. However, the new Companies Act 2013 has now made it mandatory for all companies to adopt April-March as their accounting year. The Limited Liability Partnership Act of 2008 also mandates April-March as the accounting year. Thus, over a period of twenty five years, the tax year and accounting year have been aligned for all businesses.
It is important for ease of doing business that the tax year and accounting year for businesses remain totally aligned. Estimation of revenue receipts on cash basis for the budgets of the central and state governments would not be a challenge as indirect taxes (taxes on transactions) are paid on a monthly basis. For direct taxes, current budget estimates for cash collections are based on cash collections up till the end of the previous quarter (ending December) which can be replicated in case of a different budget year while keeping the tax year unchanged. Internationally, countries like the USA and UK allow tax years which are different from their budget years. A degree of complexity in the business environment already exists with companies having to align their accounting standards with the new Indian Accounting Standards (Ind-AS), which are based on the International Financial Reporting Standards. They have also to align their accounts with the Income Computation and Disclosure Standards (ICDS) notified by the authorities under the I-T Act. More complexity is in the offing with the introduction of the new GST regime and legislations in the Centre and in the states. It is, therefore, essential to keep the tax year and accounting year aligned to reduce compliance and regulatory costs and promote the ease of doing business.
The author is of-counsel, BMR & Associates LLP, and, formerly, joint secretary, ministry of finance