From financial to calendar year

The present financial year was adopted to align the Indian financial year with that of the British government

By Author Vanam Jwala Narasimha Rao   |   Published: 13th Jun 2017   12:29 am

Chief Minister K Chandrashekhar Rao has said that in tune with the Centre’s thinking, the State government has plans to introduce the Budget on the basis of calendar year (January 1 to December 31). Preliminary discussions in this regard have been held. State Finance Minister, Principal Secretary and a team of senior officers are now studying the context and background as well as the process that was followed in implementing the system in States like Madhya Pradesh where the Budget is already being presented in the new format, ie, for the calendar year.

The Union Ministry of Finance in July 2016 constituted an expert committee under the Chairmanship of Dr Shankar Acharya, former Chief Economic Adviser, to examine the desirability and feasibility of changing the Indian Financial Year from April-March to January-December. The committee has submitted its report, which is yet to be made public, to the Finance Minister. According to sources, the committee has given reasoning for the change and its effect on the different agricultural crop periods and impact on businesses, taxation systems and procedures, statistics and data collection.

Besides Acharya, the members of the committee are former Cabinet Secretary KM Chandrasekhar, Centre for Policy Research Senior Fellow Rajiv Kumar and former Finance Secretary of Tamil Nadu PV Rajaraman.

LK Jha Committee
Interestingly, earlier too, an attempt was made by the Centre, when a committee under the Chairmanship of LK Jha was set up in 1984 but nothing serious happened then though it recommended for change to calendar year. Jha commented on the impact of monsoon on government’s budget. Various other committees and experts too recommended changing the financial year to calendar year stating that it is a much-needed reform and advantageous.

Bibek Debroy, Member of Niti Aayog, and Kishore Desai, Officer on Special Duty at Niti Aayog, in a discussion note, stated that there are no global practices or standards for choosing a financial year. Various countries follow various methods. The appropriateness of the practice of financial year from April 1 to March 31 — observed in India since 1867 — has been questioned and debated throughout its 150-year history.

The present system of financial year in India was adopted by the Government of India in 1867 prior to which it was from May 1 to April 30. The change was effected basically to align the Indian financial year with that of the British government. Many such interesting issues figure in the discussion note of Debroy and Desai.

Budget System
The ‘Budget System’ in India was first introduced on April 7, 1860, two years after the transfer of Indian Administration from East-India Company to British Crown. According to the Budget manual 2010 published by the Ministry of Finance, 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 concept of having a financial year or a fiscal year originated from the general practice of budgeting annually for government finances. As early as 1865 itself before India adopted the present system, a commission of enquiry headed by a former Paymaster-General suggested that it be the calendar year but somehow it could not happen. During the pre-independence era, the matter was examined by the Welby Commission and the Royal Commission of Indian Finance also known as Chamberlain Commission, but then too nothing happened.

Post-independence, it attracted even more attention. The Constitution of India did not explicitly define the financial year. In 1956, as well as from time to time, the matter was raised in the National Development Council where too there was a consensus for change. The Estimates Committee in 1958 favoured a change to commence from October 1, but it was rejected by the government.

The first Administrative Reforms Commission in its report suggested that from the perspective of accuracy of expenditure estimates in the Budget, January 1 would be the most suitable date. In 1983, the then Union Finance Minister invited the views of chief ministers on whether the financial year should change. Almost all the chief ministers were in favour of a change though their views were divided on the precise date of the commencement of financial year. Several of them suggested presentation of the Budget after the monsoon in the light of the knowledge of the monsoon and kharif output. Many of them were for synchronisation with the calendar year.

Arguments in Favour
The practice of continuing the Indian Financial Year from April 1 to March 31 has been questioned many a time, though unsuccessfully. When the decision was taken for having this period as financial year, the sole consideration was to align with the British government. Indian and local factors were not considered while deciding so.

The prominent consideration now for changing the financial year is the argument that the government budgets are formed without any knowledge of south-west or south-east monsoons, which impact the socio-economic conditions of the country significantly.

In other words, the government ends up formulating the Budget without reliable information about monsoon rains that significantly impact the agriculture sector, the rural economy and the overall economy. Even from the point of view of other relevant considerations, such as optimum utilisation of working season, national culture and traditions, convenience of administration and legislators, the existing financial year does not fit, according to Debroy and Desai.

Considering these factors and the current thinking of Centre and several chief ministers, it is almost certain that the financial year will soon be the same as calendar year.

(The author is Chief Public Relations Officer to the Chief Minister of Telangana)