August 29, 2016     

India: Government Contemplating a change of Financial Year

 

According to Section 2(41) of the Companies Act, 2013, (hereinafter referred to as the ‘New Act’) “financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up, provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year.

 

Financial year followed by other countries

 

The Financial year followed by The United States of America is from October 1 to September 30, while China follows the calendar year i.e. January 1 to December 31. Apart from India, countries that follow the April 1 to March 31 include the United Kingdom, New Zealand, Japan and Hong Kong, among others.

Change of the Financial Year in India

 

The government has constituted a committee headed by former chief economic advisor Shankar Acharya to study the pros and cons of adopting a new financial year. The other members of the committee includes former cabinet secretary Mr. KM Chandrasekhar, former finance secretary of Tamil Nadu Mr. PV Rajaraman and senior fellow at the Centre for Policy Research Mr. Rajiv Kumar.

 

The committee shall examine in detail the effect of the change in financial year on various sectors and shall submit its report by December 31, 2016.

 

Benefits and Drawbacks

 

Since most of the major developed countries around the world follow January to December, this proposed change would align India’s accounting system with the practice of other countries and also enable international data comparisons. This could also enable faster implementation of government policies and projects if they are taken up from the beginning of the calendar year.

However, according to Mr D S Rawat, Secretary General, Assocham India “In any case, different countries follow different financial years and there is no standard accounting practice for the world. So, change to any other calendar would not result into India aligning itself with the world. Besides, even within the domestic economy, there is no tangible reason for the unnecessary change for which the government has set up a committee to deliberate whether there is a need for a shift.”

 

The terms of reference (ToR) of the Committee are as under:

 

Examine the merits and demerits of various dates for the commencement of the financial year including the existing date, taking into account, inter-alia, the following:  

  1. The genesis of the current financial year and the studies made in the past on the desirability of change in financial year;

  2. The suitability of the financial year from the point of view of

    1. correct estimation of receipts and expenditure of Central and State Governments;

    2. the effect of the different agricultural crop periods;

    3. the relationship of financial year to the working season;

    4. impact on businesses;

    5. taxation systems and procedures;

    6. statistics and data collection;

    7. the convenience of the legislatures for transacting budget work; and

    8. other relevant matters.

  3. In case a change in the financial year is recommended, the Committee may also work out the modalities for effecting the change. This would inter-alia include:

    1. appropriate timing of change;

    2. the determination of a transitional period;

    3. the change in tax laws during the transitional period;

    4. the amendments that may be required in various statutes; and

    5. changes in the coverage of the recommendations of the Finance Commission.

 

 

 

 

 

 

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