Extension of Financial Year-Do We Really Need ?

The recent worldwide crisis on account of outbreak of Novel Corona virus (COVID-19) and resultant 21 days lock down declared by Govt. of India has put everything standstill in our Country. Prior to complete lock down announced by the Central Govt., many State Govts. has also declared complete lock down in their respective States. As a result, all the business houses are closed and movement of common mass is highly restricted.

In the mean time, the financial year (FY) 2019-20 is also approaching to an end on 31^st March, 2020. It is a pious date for all Tax Payers, Business Persons, Business Entity, Banks and for Professional like CA, CWA, CS and Tax Practitioners. But this time, on this closing date, not much activity can be done due to complete lockdown everywhere. So in such a situation there has been a demand from the corporate, taxation, auditing and accounting fraternity to extend financial year from 31^st March’2020 to 30^th June’2020 i.e. by 3 months so that business houses can close their books of accounts properly.

The Finance Minister of India though already made announcements on extension/postponements of various due dates. Such dates are mainly those due dates which are falling due in between lock down period or 31^st March’2020 or even after lock down. Similar approach was adopted by other regulators like RBI, SEBI, and MCA etc. But still, the business community is not satisfied with such postponement of dates rather demanding extension of financial year itself. In past (prior to COVID-19 breakout) also, there was some rumor about change of Financial year from 1^st Jan to 31^st December by the Govt. of India to align it with the calendar year but in real no such change was made by the Govt. of India.

Concept of Fiscal Year or Financial Year in our Country

Before discussing the need and limitations of the Govt. to extend the FY, it would be proper to first understand the concept of FY in perspective of our Country.

As per section 3(21) of the General clauses Act, 1897 “financial year” shall mean the year commencing on the first day of April.

So basically it is a one year period commencing from 1^st April and ending on 31^st March of next year for which financial statements of a government or a business entity is prepared is referred to as the financial year or fiscal year (FY). It is also used for financial reporting by businesses and other entities. Taxation laws generally require accounting records to be maintained and taxes calculated on an annual basis, which usually corresponds to the fiscal year used for government purposes. The calculation of tax on an annual basis is especially relevant for direct taxes.

Countries, depending on their institutional requirements, define their financial year (FY) different from their calendar year (which runs from 1 January to 31 December). But at present India’s financial year runs from 1st April to 31st March of next year.

Why India following FY from April to March?

Most of the countries in the world follow calendar year as FY. The multinational companies operating in India need to recast their financial statements in line with Indian FY and vice-versa. Although the exact reason for why the Financial Year starts from April 1 and ends on March 31 is unknown, the financial researchers have put forth some the few main reasons:

• The concept of FY from the period of April to March was inherited from British. After Independence, the Indian Govt. didn’t change this system.
• Hindu festival of Vaishaki or Hindu New Year also coincides with this date. So in many regions of the Country it is regional New Year
• In India, crops are harvested in the period of February- March only. This gives an idea of probable Agricultural revenue to the Govt.
• Festival Season in the month of October-December due to festival of Navratri, Diwali & Christmas push sales and to avoid the clash, March was preferred as the month of closure of the financial year and not December.

Trends in other Countries following FY from April to March

Apart from India, many Countries in the world adopted the same pattern of following FY. The key amongst them are:

• Canada
• United Kingdom (UK)
• New Zealand
• Hong Kong
• Japan
• South Africa

Past proposals to change FY to calendar year in India

As discussed above, the financial year of India is inherited from British. The Modi Government however seems keen on a switchover. On 6th July 2016, Ministry of Finance (Budget Division) has announced constitution of a Committee headed by Dr. Sankar Aacharya to examine the desirability and feasibility of having a “new Financial Year”. It was reported that the committee recommended changing to a January to December financial year.

A NITI Aayog discussion note too had mentioned that the current financial year system in India is not aligned to international practices and causes a lot of problem. Meanwhile, The Standing Committee attached to Finance Ministry, in their Report on Budget Estimates for 2017-18 tabled in the Parliament on 17^th March 2017 (para 2 on page 50), under the title “Changes in the Budgetary Schedule” has recommended that FY be changed to calendar year. But the same is not implemented yet. But in view of the recent demand and due to the current situation the government should consider whether to extend the current financial year to June or directly move to calendar year system.

Reasons for demanding Extension of FY- Post COVID-19

• Any financial statement prepared for April 2019 to March 2020, will not give a true and fair view as it does not represent one complete business cycle of the entity due to disruption of business activities.
• Physical verifications of inventories, cash, fixed assets, balance confirmations, fair-value measurements, and going-concern assessments, etc. circumstances will not be carried out on year end this time and the same shall be done after the lockdown ends.
• Calculation of year-end provisions for gratuity, bonus, and interest and so on will also not be possible in lockdown.
• Difficulty in preparing financial statements primarily related to areas that required management attentions. These could relate to forward-looking cash-flow estimates, recoverability and impairment of assets, contract modifications, etc.
• Most of the financial ratios of the Companies have gone for a toss due to Corona virus lockdown globally.
• Practical difficulties for the taxpayers (such as SMEs, professional firms, medical practitioners, etc.) following cash system of accounting.
• Many entities uses accounting software which do not permit back dated recording of transactions or entries. So there may be some practical problems to pass adjustment/closing entries on account of provisions for expenses, depreciations, and stock valuations etc. on 31^st March itself.
• An extension of the March 2020 quarter until 30 June 2020 will even out the economic impact of COVID-19 on businesses and tax revenues to the government post-closure of the financial year audits.

Challenges or limitations for change in FY upto 30^th June’2020

• India is having federal structure. Any change at Central level has to be commensurate at State level as well. With so many States and UTs, it is really difficult task to change the FY instantly.
• The correct estimations of Govt. revenue and expenditure for various budgetary heads needs to be re-casted which will be a difficult task particularly when all its wings are operating with limited manpower and fighting COVID-19.
• The reliable comparative data of past period(s) also needs to be re-casted.
• Indian Economy depends mainly on agriculture. So the effect of the different agricultural crop periods needs to be examined.
• The relationship of the new financial year to the working season needs to be checked.
• The taxation system and other regulatory laws to be amended or changed and their infrastructure /software needs to be updated in the line of new financial year.
• Statistics and data collection exercise to be done freshly.
• No transitional period will be available if change is implemented in the present situation.
• Modalities for changes in the coverage of the recommendations of the Finance Commission are to be worked out.
• Banking Sector, Insurance Sector & PSU needs to change their accounting code which in present situation seems to be difficult with bare minimum staffs operating in few of the branches only.

Author’s views

The author feels that though the demand for extension of the FY seems to be just and proper at this juncture but from the view point of the Govt. it has got long term impact as well. The Govt. has got its own limitations to make changes at this point of time. The advantages arising out of the change would only be marginal in view of the innumerable considerations in the formulation of policies etc. A change will also be disruptive. Without any meaningful benefits to offset the disruption, it would be a bad idea to change the financial year. Further it would upset the collection of data and it might take a long time to return to normalcy in this regard. The change would create a large number of problems, as extensive amendments to tax laws and systems, financial procedures relating to expenditure authorization and other matters would become necessary and in that process the administrative machinery would get diverted to problems of transition instead of concentrating on improving the tax collection machinery. So the Govt. should take a judicious decision based on all the pros and cons so that the interest of the stakeholders can be protected with minimum of efforts. If at all change is desirable, then it should be aligned with calendar year only so that it can be done once for all in line with the recommendations made by the standing committee as discussed hereinabove.

Note: The views expressed above are the personal views of the author. The possibility of other views also on the subject matter cannot be ruled out. Thus it is requested that before acting on the basis of same, please check and confirm relevant provisions of the laws/circulars/notifications/Govt. Guidelines etc.