Align fiscal year with Jan-Dec calendar, recommends study

Many developed nations like the UK, Europe and 50 of the biggest Fortune 500 cos in the US have been following the calendar year of accounting. In recent times, with the talks in Corporate India also veering in this direction, an announcement to this effect in the upcoming budget on February 1 this year is expected. That would lend more teeth to the ‘Niti Aayog’ that has made available a discussion note on the need to change India’s financial year in the public domain. 

Making a case for this, the 52page paper highlights multiple reasons for this. For instance, it says, regional climatic variations in the agro working season impact the development activities in the sector in states such as Tamil Nadu, which receives rains from the North-East monsoon. About 70 per cent of the top 50 the Fortune 500 American companies follow the calendar year as their financial year. “Considering the multi-national geographic coverage of these companies, Jan-Dec is the preferred financial year to ensure a consistency from international perspective,” the note says. 

Welcoming this is Ramabadran Sundararajan, Founder-Chairman, Mango Capital, who says this will enable Indian companies to merge with the International Financial Reporting Standards system. “Calendar year accounting will make it far more easy to read the balance sheets (with companies following the Receipts and Payments, Income and Expenditure system). The dual system of accounting being practiced will not be necessary too. Duplication can be avoided,” he says. 

KR Shanmugam, former  Director, Madras School of Economics, says there is bound to be an initial period of confusion. But there will be a need to  recalibrate the old data by  the Central Statistical Organisation to bring parity to international standards. 

“For getting the macro projections and the GDP figures right, data from at least the last five years, say from 2011 has to be reworked as the last quarter data will not reflect the true picture. So, the policy must take this into consideration to enable forecasting and obtaining the base year,” he says, noting that the practice of developed nations is to define GDP for a single year whereas our country has to capture the spillover effect of four-quarter data given the time period followed. 

Chander Pratap of Cartello, a business advisory firm, expects the announcement to happen in the upcoming budget. From a compliance perspective, the Companies Act of 2013 will also need to be amended. “Two years ago, there was no specific statutory compliance but once this  comes into operation, companies will be mandated to file their tax returns based on the calendar year,” he said, adding the move will lead to global consolidation in terms of reporting. 

“Issues such as transfer pricing, corporate tax evasion and the possible switch over of profit and loss by passing journal entries or the modification of the financial data can be arrested. It will certainly bring clarity  though the challenges of reporting different tax elements have to be addressed,” he said, pointing to tweaks required in the accounting software. 

However, there are also those who have expressed dissent to the news of this possible change. An industry insider, on condition of anonymity, says, “Changing the accounting year would not bring any difference. The need is a change in mindset. If funds allocated for a certain project are sanctioned and released only at the year end, those implementing the project are left with less than a quarter to work on a project. This is why many public utility and infrastructure initiatives lie in limbo for years together - like in the railways and transports sections.” 

He adds, “There must be a clear communication channel and coordination between the Planning Commission or those handling the funds as well as those using them. Apart from assigning accountability and responsibility, there needs to be an avenue for transparency as well in all such projects.”