MP shifts to January to December financial year. Will other states follow suit?

Madhya Pradesh on Tuesday became the first Indian state to break away from the 150-year old British tradition of an April-March financial year by switching to a January-December period. The state cabinet approved this switch on Tuesday.

The change in the financial year will kick in from January 2018.

This move comes after Prime Minister Narendra Modi directed all states to share their views on the central government shifting to a new fiscal.

But economists such as former chief statistician, Pronab Sen said that just one state changing the fiscal year would lead to confusion. “Before the central government changes its financial year, a state doing it would mean that the state budget would be pure fiction. The state will have no idea about the resource flow and transfers from the Centre,” said Sen.

There is however, no Constitutional need for states to shift to a new period for a financial year before the central government does so.

A high-level committee led by Shankar Acharya had submitted its report to the finance ministry in December 2016, also reportedly pitched for aligning the financial year with the calendar year. The committee set up in July last year, was mandated with the task of studying the merits of NITI Aayog’s suggestion to move to a January-December financial year. The committee has extended its support to this move saying that the change will align India to its monsoon and agricultural harvests.

Subsequently, a Parliamentary panel also endorsed the shift in the financial year followed by India. And in a reply to a question in the Lok Sabha, finance minister Arun Jaitley had said that before endorsing the view of the Shankar Acharya committee consultation with states and local bodies was necessary.

Economists are divided on the committee’s recommendations.

Agriculture economist, Ashok Gulati supported the change in the accounting period and said: “In case of a drought, which happens between June to September, a change in the accounting period from January to December will help in better budgeting. If the Budget is presented in November, then early allocations will help the agro economy and farmers”. Given that agriculture contributes to over 15% of India’s GDP and over 58% rural households depend on it, many experts have supported this move.

Others like Pronab Sen remain sceptical about the change. “I don’t see the need to change the accounting period. What needs to be done is timely passage of Budget, so that the construction period is not hampered. In any case, for construction, the monsoon months are a lost period,” he said.

But adoption of these recommendations by the government would mean yet another change in the Budget presentation date. In case of a January-to-December accounting period, the Budget will have to be presented in November. Parliament sessions will also have to be reworked, along with changes in data collection and working of state governments.

Chartered accountants point out that the change in the accounting period will not impact the common man. The taxation period will just change from April-March to the new 12-month period.