In May 2017, Madhya Pradesh became the first State to announce shifting of financial year format from April-March to January-December cycle. The decision is in tune with the suggestion made by the Shankar Acharya Committee in December 2016. The committee, which was formed in July 2016 to examine the desirability and feasibility of changing the financial year, recommended that over 150 year old practice should be done away with.
In its response, the Union Government indicated that there would be no changes to the present system as time needed to get a sense of revenue receipts in the post Goods and Service Tax (GST) regime.
It is against this backdrop, it is pertinent to understand the historical perspective of Indian financial year, need for changing the financial year, intended benefits and the challenges ahead.
Historical perspective of Indian financial year
The “Budget System” in India has a history of more than 150 years. It was first introduced on 7th April 1860, two years after the transfer of Indian administration from East-India Company to the British Crown. James Wilson, the first Finance Member of the Council delivered the Budget speech expounding the Indian financial policy as an integral whole for the first time.
The present financial year in India (1st April to 31st March) 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 1st May of the current year to 30th April of the following calendar year.
Need for changing the financial year
The appropriateness of the April-March financial year practice has been questioned at various points of time throughout its 150 year history. As a matter of fact, suggestions to revisit this matter started as early as 1870s. A major consideration driving such suggestions was that the financial year timing did not allow the government to account for the impact of monsoon rains, which is one of the key factors impacting the overall socio-economic dynamics of the country, while allocating scarce budgetary resources. 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 utilisation of working season
b) That the current financial year cycle was chosen without any reference to national culture and traditions or convenience of legislators
c) That the financial year is not aligned with international practices and it impacted data collection and dissemination from the perspective of national accounts etc.
As a result, budgets have been prepared with a lag in the data as reflected in three types of estimates – budget estimates, revised estimates and actual estimates.
The Central Statistical Organisation (CSO) prefers changing the financial year to calendar year as this change will align the Indian statistical series with that of the UN reporting standards and would make for more uniformity in the periods of the various statistical series.
Change in the present financial year is beset with the following challenges.
• The change would create a large number of problems, as extensive amendments to tax laws and systems, financial procedures relating to expenditure and parliamentary procedures.
• The Change in the financial year would upset the existing data collection systems and it might take a long time to return to normalcy.