ONE morning’s newspapers carried the news that the central government has decided to consider a change in the present Financial Year [April 1 to March 31] without any demands surfacing from any quarters. Simultaneously, an announcement was also made about the constitution of a four-member committee, comprising of three retired bureaucrats, one of them being the retired Chief Economic Advisor of the Government of India and the Chairman of the
committee. A senior fellow at the Centre for Policy Research is one of the three members—the other two being retired Secretaries.
The Finance Ministry has not given any terms of reference to the committee and has merely stated that it will examine the merits and demerits of various dates for the commencement of the new Financial Year [FY], including the existing one, and furnish its report by December 31, 2016. In the announcement, there is no mention about the problems with the existing FY; about demands from any quarter asking for the change; the government’s difficulties with the present FY and why it should be changed; and, why the proposal was not placed in public domain before constituting the committee.
Apparently, such major decisions cannot be taken in a snap. These need serious deliberations and homework, such as: drawing up a catalogue of problems being faced in the present system; a clear statement of policy regarding the change; a theoretical model prepared explicitly, explaining the line of change; and, a clear exposition and enunciation of the economic, social and political context.
In other words, before appointing a committee, it was imperative to be clear as to what is sought to be achieved; what would be the impact if the change is made; and, what would be the public reaction to the changes if carried out. (Assocham has already expressed its disapproval to any change).
None of such exercises seem to have been carried out before constituting the committee. Also, it has been left to the committee to work on its own without any guidelines from the government.
The exercise for changing the Accounting Year (Previous Year) for income-tax payers has been carried out in the past on the recommendation of the LK Jha Commission (Economic Administration Reforms Commission, or EARC) in 1981-83. The Commission examined the issue relating to the Previous Year. Income-tax is charged for each financial year at the rates prescribed in the relevant Finance Act, on the ‘total income of the Previous Year’. The expression ‘Previous Year’ was defined in Section 3 of the IT Act. Under the then law, an assessee was entitled to have a different Previous Year of his choice in respect of each separate source of his income under the same head. With the consent of the ITO, he could also change the Previous Year from time-to-time. The Commission felt that such arrangement led to unnecessary complications and created difficulties in cross verification of accounts. Hence, it recommended that the choice of ‘Previous Year’ should be restricted to the calendar year and the official FY only.
Acting on the recommendations of EARC, the government decided to have a uniform Accounting Year—the FY—for all the taxpayers, discontinuing the Previous Year practice of having previous years of one’s choice. In 1988, Section 3 of the IT Act, 1961, was substituted with a new Section 3, providing that all taxpayers will have only FY as their Previous Year in respect to all sources of income. Since the Assessment Year (AY) 1988-89, all taxpayers are required to follow the FY [April 1 to March 31] as the Previous Year. If an assesses does not prepare his accounts on FY basis, he will have to rework out his profit or loss for income-tax purpose on FY basis. This change created a host of transitional problems. For example, in some cases, the Previous Year became of 21 months; in some, only of 9 months. It took considerable time before the things got finally settled.
Earlier, since 1867, India was following May-April FY. It changed to April-March FY to align it with the British system, which was following April-March as the FY.
Change is the law of nature. There could be no fixity about a FY. Hence, there could be no objection if a country changes its FY. But, it needs to be done on valid grounds—not abruptly on the whim and fancy of someone in the government. A practice or system, being pursued since years, if it is changed, causes considerable disruption. When the income-tax Accounting Year was changed to FY, there was considerable dislocation and the tax department issued various circulars to clarify the change. The FY in India is being followed since umpteen years for government accounting and by many others. If it is changed to some other year, the records and registers being maintained since years will need to be replaced by new ones. The staff will have to be trained to acclimatise to the new FY. The income-tax payers may have to go through once again a spell of transitional provisions. And, that too, apparently for no benefit.
IT is becoming a past-time with the government to make changes not based on any rational or logical grounds—starting from changing the names of cities, roads and buildings for political expediencies. The move to change the FY is one not needed at all as there are no complaints of any kind about the present FY, which is working satisfactorily since more than a century. The exercises of this nature cause strain on national resources in terms of time, money and effort, which need to be wisely employed—not withered away in unnecessary exercises. The committee constituted to make recommendations regarding the change of FY is not required and needs to be dissolved.
The writer is former Chairman, CBDT