So here is the next move of our government! After demonetisation and GST, our Prime Minister, Narendra Modi has suggested to break the 150-year tradition of the British era and shift the financial year from 1st April-31st March to 1st January-31st December.
If ‘this suggestion’ would become a reality, all our accounting books would require following this new ‘financial’ year’. Most importantly, there will be no differentiation between financial and calendar years as both will become one.
Madhya Pradesh is India’s first state to change its financial year to January-December. The move will take effect from 1st January 2018.
So, before it turns to reality, let’s go back to its background to get more clarity and understand its impact =
Every government follows the financial year for budgeting its finances on a yearly basis. Here a financial year is a tenure of 12 months, which starts on a selected date and ends after 12 months.
It is mainly used for estimating and analyzing the current financial situation of governments—both state and central. In India, the financial year is from 1st April-31st March.
Here’s the Impact On=
I= Common People
- All deadlines will get preponed= Though, the modalities of the proposed changes are not clear, it is obvious to expect all the compliance deadlines to be pushed by three months. It means employees would have to submit investment proofs by the end of October so that their employers can compute their tax liability and deduct their TDS by December accordingly. Then, if you are staying on rent, the rental agreement should be valid for the tenure from January to December.
- Late investments would not fetch tax benefits=It is the last months of the financial year,e., between January and March that most of the insurance companies receive the maximum premium. The same thing happens with fund houses as well, which receive 50% of inflows into their tax-saving ELSS funds during last month’s only.
Those people who deter their tax planning till the last months of the financial year would be particularly hit. With the change in the financial year, these investments would also need to be made before 31st December.
If the government makes this change effective from this year, you would have to buy a mediclaim policy in India before December to ensure you get tax benefits on it. In case you already have a health insurance policy, make sure it stays active within the new financial year.
- Taxpayers with foreign income will be benefitted= Any change in financial year would help taxpayers with foreign income. As most of the countries are following the financial year that ends on 31st December, aligning the date with the dates followed by the rest of the countries will remove the confusion when it comes to reporting the foreign income. Due to change, the entire process of tax calculation and taxable income will become easy and quick.
Here are some of the countries where the fiscal year is from 1st January to 31st December: –
|Greece||Ireland (From 2002)|
|Sweden (for individuals)||Taiwan|
|Ukraine||The United Arab Emirates|
It is necessary for taxpayers to carefully review their investment pattern to optimise the tax benefit in case there would be a change in India’s fiscal year.
Those companies who prepare two separate account books for the calendar and financial year would now don’t require to go through the hassles as one account book would serve both the purposes.
Is It a Right Move?
Like the other changes introduced by the government, this change will also cause some initial hiccups. As companies and government departments are already adjusting itself to GST, the change in the financial year would mean battling with two unsettling changes at the same time.
However, it would surely be a freedom from remembering the dates of both the calendar and financial year, and most importantly, how they act differently.
If you look deeply, the discussions around the change in financial date have also emphasized on the need of doing timely tax planning. Many of us deter our tax planning till the last moment, however, just imagine, what would happen if the new financial year date becomes effective from tomorrow? Or, what if your new financial year would be from 1St April to 31st December? Just to save your tax, you would look around and blindly buy/invest in insurance and investment products without divulging in detail and realise whether you need them or not.
For instance, we all know, buying health insurance policy is necessary to get protection against soaring medical costs, however, only a few think about purchasing it. So, when you would come to know that the government has changed the financial year, you would blindly buy health insurance without even considering its benefits just because it gives tax benefits under Section 80D of the Income Tax Act.
To sum up, while the change in the financial year with regard to the global practice is good, there will also be a significant one-time cost for both the government and the industry. So, whether this move would help or not would depend on various factors and only time can tell its real impact.
But you should consider this discussion as an eye-opener and invest in financial products much before the due date. Choose right insurance policies, like health insurance policies well beforehand and duck the last-minute googly from the government.