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Kanika Datta: Small change, big deal

The business community has added the spectre of retrospective tax laws to the litany of complaints against India

Kanika Datta  |  New Delhi 

After this year’s Budget, the international and domestic business community has added the spectre of retrospective to the litany of complaints against India. The usual big-ticket suspects are uncertain policy, multiplicity of rules, corruption, and so on and so forth. But commercial life in India involves some other peculiarities that don’t get captured in the big indices like the World Bank’s Doing Business or other numbers.

Let’s consider the government’s fiscal year. It starts on April 1 and ends on March 31. Several senior chartered accountants have been unable to explain why we follow this configuration. Some say it dates back to the days when India was mainly an agricultural economy so it’s a harvest-linked thing. That explanation is tenable only if you consider the rabi harvest; but the kharif harvest, which accounts for a little over half foodgrain production in India, is in October. Others say it’s a British legacy. The government of the United Kingdom does indeed follow a similar fiscal year (though no one can explain why it does).

India is not unique in the choice of a non-calendar fiscal year. Former British Dominions like Canada and South Africa follow a similar fiscal year. The Irish government did so too until it sensibly changed to a calendar year in 2001 at the request of a finance minister. Pakistan, Australia and Egypt follow a July 1 to June 30 year.

Why should it matter? That’s because in India the fiscal year is also compulsorily the tax assessment year for corporations. Now, under the Companies Act, companies can choose any fiscal-year configuration they want for accounting purposes. But for tax assessment purposes, they are required to close their books on March 31. To avoid complications and extra work, most companies synchronise their fiscal and tax years. But for companies (whether of Indian or foreign origin) that have global operations, there is an added layer of complexity. In effect, it means that they are forced to maintain two sets of accounts — one that matches the government’s fiscal year and another that conforms to the configuration of the global entities. As one chief financial officer admitted, “it’s a big pain”.

Several advanced jurisdictions allow companies to choose any 12-month or 52-week period for their tax assessment year (so although the UK government follows an April-March fiscal, most private companies there follow the calendar year). Interestingly, so did India until 1989 (and some Indian companies followed the Samvat year as their accounting year till then).

Why follow a system that is out of sync with most of the world’s significant economies and, indeed, with the way Indian business is shaping up? Governments in both China and Russia, for instance, follow the calendar year as does much of Europe. It could be argued that the US follows the weirdest fiscal year of all — October 1 to September 30. This, too, is a relatively recent trend dating from the mid-seventies; before that, the US followed the July-June configuration to apparently allow Congress more time to arrive at a Budget. But then, the US is the world’s largest economy and it, too, allows corporations the flexibility to choose their tax and fiscal years.

If that’s one irritant, how about our use of lakhs and crores, officially and commercially? Again, no accountant has been able to explain why we use this system instead of the more universal million, billion and, increasingly, trillion. It’s probably another imperial hangover, itself drawing on previous local practice, as some colonial documents attest. Converting from the Indian system to the global one involves shifting decimal points and zeroes around, which isn’t a huge problem for most math-savvy Indians, but it takes foreign investors some getting used to. It also introduces an element of randomness in the way listed companies report their numbers. For instance, a check of Sensex companies by Business Standard Research Bureau shows that numbers in the annual reports of Bharti Airtel, Maruti Suzuki, ONGC, are quoted in Rs millions. Reliance Industries, Tata Steel, Tata Motors, TCS and Infosys, on the other hand, quote in Rs crore. Note that most of these corporations have global operations; consolidating their balance sheets must be tough. And finally, there’s the fractional time zone. Indian Standard Time is set at a longitude running through Allahabad. This makes India 5.30 hours ahead of Greenwich Mean Time, the international standard. It is the only country with a fractional time zone (apart from parts of Australia). Again, it is a colonial choice that had endured for no good reason and could be easily remedied.

Taken individually, these quirks are probably mere irritants in the small change of daily commercial life. Added up, they do suggest a disconnect with the rest of the world and in that sense, they have a symbolic significance. If Yashwant Sinha could alter decades of settled practice and have the Budget presented at 11 a m instead of the colonial practice of 5.30 p m (to co-ordinate with the UK’s Budget in London), making these small changes should hardly be an issue.

First Published: Thu, April 12 2012. 00:21 IST