Changing the Fiscal Year

What is the issue?

Madhya Pradesh government has announced that it will implement the aligning of fiscal year (FY) with the calendar year by presenting its budget for 2018 in December 2017.

Who mooted this idea?

• The finance ministry (FM) had mooted a change in the Financial Year in 2016.
• In July 2016, the FM constituted a committee led by the former chief economic adviser, Shankar Acharya, to examine the “desirability and feasibility” of changing the Financial Year.
• In December, after the committee submitted its report, the ministry denied an imminent change in the FY.

What are the justifications given?

• Well before the Acharya Committee finalised its report, a discussion note put out by NITI Aayog — written by its member, Bibek Debroy, and Kishore Desai — had listed several reasons:
• The primary one being that it would arm the government with levers to effectively and adequately reorient the budget formulation exercise.
• Their point was that the April-March year prevented policymakers and the government from taking into account the monsoon situation — important because the Budget is an important tool to address socio-economic requirements, and the farm sector dominates the country’s socio-economic dynamics.
• They also pointed to the higher share of the farm sector in the output of some northern states. There was also a mention of global practices.
• China, Brazil, France and Germany follow the calendar year; in the United States, the federal government’s fiscal year runs from October 1 to September 30.

• Most top US and European firms have the calendar year as their business year.

What do the critics say?

• The proposal had evoked mixed responses with the NITI Aayog supporting it and the industry body, ASSOCHAM, issuing a trenchant critique.
• The ASSOCHAM, had argued, changing the financial year will not only mean a change in book-keeping, but also in the entire infrastructure of accounting software, taxation systems, human resource practices involving huge costs for both big and small industries.
• The shift would cost hundreds of crores of rupees, the industry body had said.
• Aligning the FY with the calendar year would require the budget to be presented in October or November, about the time when sowing for Rabi crops — most importantly, wheat and mustard — begins.
• It defies logic as to how the finance minister will conduct this exercise with, at best, a sketchy idea of the harvest next year.
• From an agricultural standpoint, in fact, July-June would be the ideal financial year, as Kharif sowings peak in July with the arrival of the monsoon a month earlier.
• There is another, larger point — which is about whether the impact on a sector whose contribution to national income has declined to well below 20%, should be the driver for such a major change.

What is the way ahead?

• Perhaps it would have been better to first adopt an accrual-based system of accounting, which better reflects the state of the government’s accounts.
• The Finance Commission had recommended this earlier — and a previous government had accepted it in principle and mandated the Government Accounting Standards Advisory Board to draw up a detailed roadmap.
• This would reflect more accurately the government’s assets and liabilities, and provide a far more comprehensive and transparent picture of its ‘balance sheet’.

Source: Indian Express