Depending on who you are asking, a new year can either begin on 1st January or 1st April. April is the advent of summer for most, but for a lot of people, it is the ending of a very stressful time. The reason behind this is that the financial year is not the same as a normal year.
What is the financial year?
Each financial or fiscal year begins on 1st April and ends on 31st March of the subsequent year. Even when we file our individual ITRs, we consider this particular period. While this particular timing has been fixed since we have a streamlined financial system- here are some reasons why India may have followed this particular span:
One of the first reasons that are put forth for this is that India was under British rule for over 150 years. The British followed this accounting period that starts in April and ends in March. When East India Company began its rule in the nation, they started following this same concept for India. Hence, this is one of the most obvious reasons for us to follow these particular dates. The Indian government didn’t change this pattern so it’s still being followed.
The second reason may have its roots in India agrarian foundation. The estimation of the yields in February and March decides the income and hence this may be one of the reasons for deciding this time to be the financial year too. On the consumer front, keeping October-December as the deciding time can get difficult for companies as it is time-consuming due to the festival rush of Navratri, Diwali, Christmas and end-of-year sales.
All of the aforementioned reasons are perhaps why our financial year starts from 1st April and ends on 31st March. Also, here is an interesting fact – other countries that follow the same pattern include Canada, UK, New Zealand, Japan and Hong Kong.
What is the accounting year?
The accounting year is a period that a company follows to draw up income estimates as well as the expenditure. Each company has its own accounting year, which usually coincides with the financial year but there are always exceptions. For instance, Nestle India has assigned its accounting year to be January to December. On the other hand, Gillette India follows the July to June cycle. MRF follows October to September. The RBI also used to follow July to June cycle. However, the new Companies Act asked for a uniform fiscal year that aligns with the April to March cycle.
What is the correlation?
Last year, the Reserve Bank of India had a plan to put the financial year in tandem with the financial year followed by the centre. So, the fiscal year 2021-2022 started on 1st April. The fiscal year in 2019-2020 ended on June 30, 2020. The new year began on 1st July 2020; but in order to better align things in the future- RBI decided to end the last fiscal year on March 31, 2021. This helps in beginning the fiscal year on the 1st of April from every coming year.
By aligning the two, it makes it easy for the central bank to do bookkeeping. Additionally, there is a probability that the interim dividend that occurs because of the time difference may not need to be announced as well.