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Should We Change the Current Financial Year?

Change is the only constant, as the adage goes. Some changes are welcome, some not, but in all likelihood, there’s a high degree of inevitability including initial discomfort that comes in its wake. The Hon’ble Prime Minister has been a change agent for India, and ever since he wore the mantle three years ago, we have continued to witness policy changes with characteristic regularity. And now, his latest pitch on shifting to a Jan – Dec financial year, is increasingly gathering mind-share.

Being rather vocal about it in a recent Niti Aayog meeting, he wanted this debate to be taken up in all earnestness and the changes implemented, once the feasibility angle and the impact on the economy are cleared. Agricultural income is a substantial part of our GDP and the suggested change could prove to be beneficial to farmers, whose livelihoods are dictated by the cycles in a calendar year. But, is that rationale strong enough? Furthermore, what would it entail for Indian IT? While we may not be best qualified to attempt the former question, but there’s no gainsaying that much can be said about the latter.

The current financial year that’s in practice (April – March) is aligned to the UK system of doing things. Globally, countries are not really aligned in tax reporting, and MNCs in India are tasked onerously to adhere to multiple reporting schedules (including Indian reporting as per Companies Act 2013) based on their company’s parentage. Naturally, this adds to cost and complexity! Which brings us to the next question – Given this diversity, is there any real merit in wanting to effect a change in financial year?

NASSCOM, the nation’s apex body for IT conducted a study within its 2500-odd member base to come up with a conclusive answer. But as expected, the views expressed were compelling from both sides.

Pros:

Interestingly, the ayes heard were from many foreign subsidiaries or those which are headquartered outside India. They opined, moving the financial year in line with the calendar year would straightaway put them on an equal footing with their global counterparts. Having two different financial years, as mentioned earlier, add to costs, complexities and an array of procedural challenges.

Cons:

Those in favour of naye, made for a compelling case too, and again the emphasis was from cost and complexity standpoint. Substantial investments outlaid to meet current financial year reporting will amount to nought, without accruing any significant benefits operationally, if the current period is changed. Moreover, under Companies Act 2013, financial year had to be changed to April – March to ensure uniformity. Right now, the mood isn’t too upbeat in wanting yet another change.

What comes through from both the lines of argument is this:

  • Having two different financial years – stipulated by govt. and Companies Act – is best avoided. It leads to increased cost and complexity without any comparable benefits.
  • If the two FYs are in sync, then it’s a welcome change. Practically, it may not be possible to effect both these changes at the same time, but really we are considering a foreseeable future.

We started off with the premise – change brings in discomfort. Here’s an approximation of the discomfort:

  • Financial: Cost of compliance will go up for the companies in case the accounting year under Companies Act and Financial year are different.
  • Operational: All present systems and processes would be required to be realigned with the new financial year.
  • Accounting/reporting: We don’t foresee any major difficulty for industry on reporting challenges, if the operations are aligned to the change.
  • Transition time: The industry would need adequate transition time to be able to plan and move to any new financial year.

 

Well in all fairness, the jury isn’t out as yet.

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