Financial year or Fiscal year is the a period of twelvemonths in which governments, companies,business and individual citizens calculate their budgets, profits, and losses. They comply with their tax liability and calculate their current market position considering their expenditure. Financial year is often used in business to compare with the calendar year. This fiscal year is a one-year period that companies and governments use for financial reporting and budgeting.
A fiscal year is most commonly used for accounting purposes to prepare financial statements. A fiscal year is important to publicly-traded corporations and their investors since it includes revenue and earnings making year-to-year comparisons possible. For tax purposes, the Internal Revenue Service (IRS) allows companies to be either calendar-year taxpayers or fiscal-year taxpayers.
It comprises of 12 months which is generally 1 April to 31 March. Although a fiscal year can start on January 1st and end on December 31st, not all fiscal years correspond with the calendar year. For example, universities often begin and end their fiscal years according to the school year.
In India we follow the financial year 1st April to 31st March. This financial year is a legacy left behind by the British. It was the East India Company which first brought this concept of 1st April to 31st March as the Financial or Fiscal year while they were ruling the undivided India. From then we all are following the same and we have made it part of our life.
Meaning of Financial Year and Previous Year according to Income Tax Act,1961
In the Income Tax Act, 1961, Sections 2(9) and 2(34) of defines the ‘Assessment Year’ or Financial year' and ‘Previous Year’ respectively.
As per Section 2(9) of the Income Tax Act, 1961 the term ‘Assessment Year’ means the period of twelve months commencing on the 1st day of April every year. The Assessment year is the financial year of the Govt. of India during which income of a person relating to the relevant previous year is assessed to tax.
Every person who is liable to pay tax under this Act. files return of income by prescribed dates. These returns are processed by the income tax department officials and officers. This processing is called assessment. Under this income returned by the assessee is checked and verified. For instance, Assessment Year 2020-21 is a time of a year beginning from 1 Apr. 2020 and finishing with 31 March 2021.
While, as per section 2(34) of the Act, “Previous Year” means the previous year as defined in section 3.
Section 3 of the Act defines previous year as follows:
For the purposes of this Act, “previous year” means the financial year immediately preceding the assessment year. Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.
In fact, many nations in the world such as Japan, United Kingdom, Canada, New Zealand, Hong Kong, South Africa follow Fiscal Year of April to March, each year. But there are only 33 countries following the traditional old April to March financial year. Rest of other developed countries like Spain, Italy, France, UAE, etc. follow the Calendar year i.e. January 1 to December 31, as their financial year. As majority of the developed countries follow Calendar year as financial year, countries following old financial year are now facing few drawbacks to get in align with rest of the developed countries.
Government of India is thinking of change of Financial Year (April to March) to Calendar Year (January to December). Prime Minister, Mr. Narendra Modi had given a proposal in this respect in a NITI Aayog’s meeting. If this would be done, it would close the chapter of Financial Year of April to March introduced by Britishers in 1867,150-year ago. Implementation of Calendar Year in India as Financial Year may get operational issues first year in this way. Hence, it will be necessary to bring the important changes, data right now a half year prior before carrying the enactment with this impact.
As government of India has been taking steps along with Ministry of Corporate Affairs and Income Tax Department to make this amendment which will not only be challenging for common citizens but also for organizations & government but eventually it will lead country into better position overall.
Pros of this Amendment will be:
- This amendment will also benefit many MNC firms in India as they will not have to prepare different sets of accounts for different accounting period which will also ease their work at the time of consolidation of accounts. It will be easier for the companies to consolidate their data and manage their report for their respective holding companies.
- This will likewise assist the administration to estimate their spending arrangements, as this will adjust the monetary year to the critical storm cycle. Additionally, this will help in better designation of assets to the farming area, in light of the nature of storm in that specific year.
- International tax payers will also be quiet at ease due to no change in the period of taxation of their home country and other countries.
Cons of Amendment will be:
- It will prompt numerous different changes, for example, moving Parliamentary Sessions, spending introduction in November-December, redesigning charge foundation and laws, charge appraisal year which could prompt disarray.
- With the whole framework of bookkeeping programming and tax collection frameworks changing, there could be an enormous one-time cost for both of all shapes and sizes organizations.
- Much the same as the past demonetization and GST usage, changing the monetary year may likewise make a little vulnerability. Subsequently, this move should be very much arranged and executed to evade any disturbances in the economy.
No Extension of Financial year
Lately, a post of a newspaper got viral on social media because demand to extend the financial year was in light of the shutdown that was put in place to combat the COVID-19 outbreak. In the article, it can be read that ‘fiscal 2019-20 will end on 30 June 2020 while fiscal year 2020-21 will begin on 1 July 2020 but ends on 31 March 2021’ in the case of RBI. The article does not claim that RBI extended its current financial year till 30 June 2020 because it is already till 30 June 2020.
Even though 15-month year would look financials look better compared to the previous year,the government through a notification, clarified that it has not changed the beginning of its financial year from April 1 to July 1 - as is being claimed by some social media posts. The beginning of the current fiscal year (2020-21) would begin normally on April 1.
The finance ministry said, "There is no extension of the financial year The government has not extended the current 2019-20 fiscal year and it will end as scheduled on March 31." PTI erroneously reported that the new financial year will start from July 1. The news alert and the related story have been withdrawn. "
Industry has been demanding extension of fiscal year by three months in view of the economic impact caused by outbreak of Covid-19. The administration's explanation comes after a Gazette warning, which related to an adjustment in dates for assortment of stamp obligations, was doing the rounds in certain circles. Hence officials said that date of applicability of stamp duty has been changed from April 1 to July 1.
The finance ministry in a statement said amendments have been made to the Indian Stamp Act by deferring the effective date of applicability from April 1 to July 1, 2020. To rationalise and harmonise the system of levying stamp duty and help curb tax evasion, the government had through the Finance Act, 2019, amended the Indian Stamp Act, 1899. Certain changes were to be effective from April 1, 2020. Through a notification, the revenue department said these amended provisions will come into effect from July 1, 2020.
What Made up to these Rumours?
The coronavirus flare-up couldn't have come at a more terrible time. It is the period of March and there are numerous monetary cutoff times that fall right now. These incorporate filing of income tax, , connecting of PAN and Aadhaar and so on.
Everywhere throughout the nation, urban communities have been locked down , curfews have been forced and individuals are telecommuting. This is on the grounds that individuals have been advised to keep away from crowded places.
"This notification pertains to few amendments in Indian Stamp Act wherein stamp duty on security market instruments shall be collected through stock exchanges and depositories. This was to get implemented from 1.4.2020 but is now forwarded to 1.7.2020 due to current situation," said government officials. – SOURCES
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The administration's explanation comes after a Gazette warning, which related to an adjustment in dates for assortment of stamp obligations, was doing the rounds in certain circles. Therefore, the government announced that Implementation of Stamp Act changes deferred by 3 months till July 1 which was misinterpreted as change in financial year as auditors as well as tax practitioner were in a view with the goal that business houses can close their books of records appropriately to broaden the money related year was considering the shutdown that was set up to battle the COVID-19.