Blast From the Past: India’s Financial Year Pattern: A colonial practice or something more?

Introduction

Most of us file our taxes before March 31 every year, most businesses prepare their financial statements before the said date and the Government presents its budget around the same time. All that happens because it is the end of the Financial Year. Why does the Financial Year in India start on April 1 and ends on March 31? Would it not be better to have the Financial Year coincide with the Calendar Year? Very few of us are aware of the reasons behind the same. Hence, on the last day of the Financial Year, we attempt to find the answers to these questions in this brief article keeping in mind the legal relevance of the same.

What is Income Tax?

Income Tax refers to the tax we pay to the government depending on the income or profit we have received in a financial year. Tax is collected in 2 forms, i.e. as Direct Tax and Indirect Tax. Indirect Taxes are the ones that we pay additionally as SGST and CGST for the groceries we buy or the food we eat. Direct Taxes are the ones that is deducted from our salary or when we pay taxes on the property we own.

The Direct Taxes that we pay to the Government is utilised by our ruling Government for Infrastructure developments, betterment of the society, payments to the public servants like Army, Navy, etc.

What could have gone into marking the time period of a financial year?

The first misconception is that it is only India which follows the April-March Financial Year system. The United Kingdom, Canada, New Zealand among others also follow the same pattern. Various reasons are cited when it comes to the reasoning behind the financial year ending around March 31. We are listing out all the common reasons below:

The British Influence

One of the primary reasons cited for the March-April time frame was the influence of British rule and the resultant adoption of financial practices prevalent in the UK. Until the 1580s, most countries in Europe used to follow the Julian Calendar which was followed since 45 BC. Dissatisfied with the time-related inaccuracies of the same, Pope Gregory XIII ordered the adoption of the new calendar which was later known as the Gregorian Calendar. When the Gregorian Calendar was finally introduced in 1752, the British were 11 days behind the rest of Europe. The Lady day as per the Julian Calendar (March 25) was the customary date of tax collection. To ensure that there is no loss of tax revenue due to the new Calendar, the British scaled the end of the tax year to April 4, while the new tax year starting on April 5. As the year 1800 was not a leap year, the tax authorities extended the new year to start on April 6.

The present tax laws of UK also reflect the same. As per clause (3) of Section 4 of the UK Income Tax Act, 2007 “A tax year begins on 6 April and ends on the following 5 April.” It is said that when the British Empire came to India, they established a financial system akin to theirs while adjusting the end date to March 31 to avoid complexities. April 1 also coincides with the Hindu month of Vaisakha which is the Hindu New Year as per the alignment of the moon as per lunisolar calendar which was the reason it found footing in the Indian scenario.

The Agriculture Cycle

Another school of thought behind the fiscal year being April-March is the agriculture cycle. The agriculture cycle in India comprises of two major crop seasons: Rabi and Kharif. The Kharif season starts in April and the Rabi season crops ripens in March. Since India was an agrarian economy from the beginning, many argue that the said fiscal was best suited for the economy. Post-independence, India’s official calendar was fixed on the strength of recommendations of Calendar Reform Committee constituted in November 1952.^[1]On 6th July 2016, Ministry of Finance (Budget Division) announced the constitution of a Committee headed by Dr. Sankar Aacharya to examine the desirability and feasibility of having a “new Financial Year”.^[2]Starting with the 2017 Budget, the Modi Government attempted to slightly alter the Colonial Era financial practices by presenting the budget for the year on February 1 instead of the usual last day of February. The Government also expressed its intentions to shift the Fiscal Year to a January-December timeline instead of the present April-March with the aim to negate the issue of suboptimal utilisation of work season and fix the misalignment with the international market impacting the collection of data and financial dissemination.^[3]

The Enactment of the Income Tax Act, 1961

The Income Tax Act, 1961 came into effect on April 1, 1962. The enactment of the Income Tax Act around the same day as the start of the new financial year resulted in reinforcement of the already followed April-March financial calendar pattern.

The Festival Season

The final probable reason for March 31 as the final day for Financial Year is based on the social aspects of the country. India’s biggest festivals like Navratri and Diwali fall in the later part of the year (around October and November), followed by Christmas. There is a high rate of financial activity during this period i.e. the last quarter of the year. Hence, businesses deem it more plausible to indulge in the process of accounting in a time of low activity which also coincides with the time after the effects of the annual budget are seen.

What a financial year end means to citizens of India?

If you are a citizen of India/Non-Resident Indian below the age of 60 years and have an income above 2.5 Lakhs, you are liable to pay tax. For those working in companies, the taxes are deducted directly from the salary. Also, entities like Hindu Undivided Family (HUF), Body of Individuals (BOI), Association of Persons (AOP), Local Authorities, Corporate Firms, Companies and All Artificial Juridical Persons are liable to pay Tax on their profits. As per Income Tax Act, Taxes are levied on Salaries, profits and gains earned from a business or profession, Income from house/property, capital gains, income from other sources.

These days if we don’t file our TDS/TCS statements, we won’t be allowed to take loans from banks or financial services. And nonpayment of taxes can put us in serious issues with the Income Tax Authorities with punishments even up to jail terms. It is good to read up on the tax policies and the Income Tax Act before filing our taxes.

Conclusion

In the absence of the exact reason why India’s financial year ends on March 31 every year, the best way is to understand the possible historical reasons which could have led to the practice. Although the four schools of thoughts are not conclusive, they seem to be the most plausible reasons as to why our country decided to have the financial year run differently from the calendar year. And being a true citizen of our country, it is a good habit to pay our taxes on time which directly supports the development of our nation.

DISCLAIMER: The information provided in this article is for educational purposes only. The same cannot be construed as legal advice.

^[1] “Financial Year (FY) or Fiscal Year.” Arthapedia, www.arthapedia.in/index.php?title=Financial_Year_(FY)_or_Fiscal_Year.

^[2] Ibid.

^[3]Livemint. “Financial Year Change Likely from 2018, Budget May Be Moved to November.” https://www.livemint.com, Livemint, 26 June 2017, www.livemint.com/Politics/6V6nBOv9bvkqVgijn2jUTP/India-may-shift-to-JanuaryDecember-financial-year-from-2018.html.