11 July 2009
One of my client on a very deep sight has asked me a question for the logic of Financial Year to begin from April and ending with March. He wants to know why not calender year and this odd dates. if anyone knows any good logic behind the same apart from the income tax regulation and goverment fiscal year kindly get back to me...
11 July 2009
In India, you are not allowed to chose any odd date/calenderyear as your financial year. It is a law. Government and all the tax departments works in this period and we also have to prepare our accounts/returns for this period.
11 July 2009
This pattern came into being in the British period in India where the British government formulated its annual budget on the basis of anticipated
revenue receipts which would determine the planned expenditure and levy of new taxes and duties during the year. India, being an agricultural country, the main annual income depended on the unpredictable outcome of the main crops which start getting ripe in February/ March. This anticipated crop-year income thus became the forecast for the likely yearly revenue receipts to the government.
The British followed the April to March system for financial accounting. Also, under the old Julian calendar that Britain followed, April 1st loosely coincided with an Indian month that is considered the New Year in many Indian cultures.
India was ruled by the British for a long time, and we followed the Apr-Mar financial year during that time. After independence, India has continued with the same system.
The Income Tax Act
The current income tax act was enacted in 1961, and it came into effect from April 1, 1962. And therefore, our financial year begins on April 1.
Periods of High Activity
The entire exercise of preparing accounts and taxes is very time consuming. Therefore, it makes lot of sense if it doesn’t coincide with any period of high activity.
The end of the calendar year has festivals like Christmas and New Year. This is the period in which people do a lot of shopping, and all the businesses are quite busy!
Also, since it is a shopping season, the stock lying in warehouses and inventories are quite high. This means any measurements and accounting won’t be very accurate.
So, to not load everyone with extra work, the financial year ends in March, when the activity and inventory levels are normal.
Agricultural Patterns
India is largely an agrarian economy, and the livelihood of a large population still depends on agriculture. Therefore, the accounting system should be in line with the crop pattern.
We have two major crop seasons: Kharif and Rabi (or Rabbi). The Kharif season starts in April, and the crops from the Rabi season get ripe in March. During the time of the British, most of their taxes were from the crops. So, the government prepared its annual budget keeping these crop patterns in mind.
Therefore, the financial year was from 1st April, and ends on 31st March. Even after independence, we are following the same fiscal year.
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