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Why does the financial / fiscal year start from 1st April?

The financial year (FY) runs from April to March. Companies present their yearly account for the period April – March. The government presents its budget for April – March. Even we file our income tax information for April – March. Ever wondered why the financial year is from April to March, and not January to December?

I always wondered about the fiscal year in India. Why is it from April to March? Wouldn’t it be a lot more convenient if it coincided with the calendar year – January to December? Isn’t it annoying to write two years every time we want to talk about a financial year – like FY 08-09!

(Want to understand terms like financial year, assessment year and previous year better? Please read “Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)”).

I thought maybe it is something peculiar to India. But when I did some research, I found out that we are not the only ones! There are a lot of countries where the financial year is from April to March. Some examples are:

  • Canada
  • United Kingdom (UK)
  • New Zealand
  • Hong Kong
  • Japan

There is no single, clear explanation of why the fiscal year starts in April. But here are a few possible explanations:

 

British Legacy

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.

 

My Conclusion

I personally find the explanation based on agricultural patterns to be the most accurate. What do you think? Is there any other explanation? I would love to hear your comments.

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