Why PM Narendra Modi wants India to dump a 150-year-old financial habit

Among the many things Prime Minister Narendra Modi is likely to talk about in his fourth Independence Day speech this month is a proposal to change a 150-year-old practice that goes behind fixing India’s Budget and much of your financial planning.

He may push for a January-to-December fiscal year instead of the current financial year — from April to March — that was adopted in 1867, principally to align the Indian financial year with that of the British government.

While it may look like a seemingly straightforward step at keeping up with a global benchmark, there’s more to it than meets the eye. Here’s how:

1) If the calendar year comes into place, the budget dates will need a fix too. The Centre then gets to squeeze in a budget in November 2018, six months before the general elections in May 2019. In November, the government may come up with all the populist measures with a hope of impressing the voters. It also gives the Centre ample time to adjust to new realities like GST, domestic and global uncertainties.

2) Most governments have the grouse that the financial year timing does not allow them to account for the impact of monsoon rains. Agriculture contributes more than 15% to India’s GDP and above 58% rural households depend on farm yields. Assuming there is drought, which is the norm between June and September, a change in the accounting period will help in better farm allocation.



3) Business will be good. It makes sense for India integrates itself with the world economy. Foreign firms don’t have to struggle with two types of financial years, here, and at their parent country, which means better business for us.

4) It creates tax discipline. If Modi’s plan goes through, taxpayers who do their tax planning in the last three months of the financial year will be particularly hit. Almost 70% of the premium income of insurance companies and nearly 50% of inflows into tax-saving equity-linked savings scheme (ELSS) funds come in the last three months of the financial year. Medical insurance bought in the dying days of the financial year may suffer the same fate. “Taxpayers should be prepared to invest more before December 31 if a big chunk of their tax-saving investments have been made in the January-March period,” said Sudhir Kaushik, CFO and co-founder of Taxspanner.com. Some taxpayers have lumpy incomes. Those who earn a chunk of their annual income or profits in the last quarter may see a big drop in their tax liability this year.

So far, the Centre has ruled out any such move. “In order to start the next financial year from January 2018, the government needs to present the Union Budget some time in November, which does not seem to be possible as the process is time-consuming and has to be kicked-off well ahead,” minister of state for Finance Santosh Gangwar said. “These are points of discussion in the government. For now, consider March as the end of this fiscal year.”