Change in fiscal year insufficient to address shortfalls in budget process

Myanmar Times , Oct 20, 2017 by:  THOMPSON CHAU

While seen as positive, Nay Pyi Taw’s proposed change of fiscal year alone cannot address the lack of flexibility in the annual budgeting process, according to businesses. The adoption of multi-year budgeting should be implemented instead.
Lawyers, investors and financiers told The Myanmar Times that while changing the fiscal year could bring some advantage to the economy, changing the dates without improving the budgetary process or tax approach does not solve the major problems faced by the private sector.

Last week, the government proposed to adopt an October 1-September 30 timeframe beginning from the 2018-19 fiscal year, while keeping the outdated single-year budgeting system. This would place Myanmar’s fiscal year in line with that of the US, Thailand and Laos.

A fiscal year is a period that a company or government uses for accounting purposes and preparing financial statements. Dating back to 1974, Myanmar’s current fiscal year starts from April 1 and ends on March 31.

Budget process

While the proposed change will improve the situation for some companies in sectors like construction, it does not solve the wider budgeting issue. The lack of flexibility caused by annual budgeting is a significant problem prevalent among public construction projects. This is because ministries and departments pay them before March 31 every year, even if they have not completed their work. Otherwise the construction companies will not be paid until much later in the following fiscal year. That will delay projects and cause wastage. Changing the date cannot resolve this entirely.

Nishant Choudhary, co-chair of legal advocacy group at EuroCham, said this affects the larger infrastructure projects in particular, as they probably cannot be completed within a year’s span and are thus delayed under a new budget.

Head of Yoma Strategic Melvyn Pun said that implementing multi-year budgeting would be more effective than changing the fiscal year, and would drive more efficient public spending and facilitate a clearer direction and planning for the government. Spreading out the tender throughout the year would also be beneficial.

Still, the proposal does have some advantages.

“The major portion of the March-to-April financial year system slows down the projects as the rainy season intermediates, where most of the projects and especially infra projects cannot be completed. This is exacerbated by re-budgeting processes," Mr Choudhary said.

Mr Pun also noted that the proposal reflects Nay Pyi Taw’s efforts to actively solicit and address private sector concerns.

“It’s pleasing to see the government responding positively to private sector concerns, and this will hopefully help construction companies plan for their tenders while better aligning the timing of government budgeting and spending,” he said.

Aligning with taxpayers

The other advantage to changing the fiscal year is tax efficiency.

A government chooses its fiscal year depending on many factors, including the general tax revenue flow, and that refers to which areas of the economy are the main contributors to tax revenue, according to Eric Rose, lead director of Herzfeld Rubin Meyer & Rose. It also depends on whether businesses are allowed to consolidate their revenues, in particular on a regional basis, in which case smaller economies may want to align their fiscal year with that of their main trading partners, as well as the significance of seasonal revenues, such as farming, construction and retail.

It is a good practice for those businesses to end their fiscal year right after the period when they receive their highest revenue. For example, international retailers end their fiscal year after Christmas, agricultural firms end their fiscal year after their harvest.

“As Myanmar is promoting investments in agriculture, forestry, livestock and breeding businesses, infrastructure development and construction, and many other seasonal businesses, it is sensible for the government’s fiscal year to be aligned with that of those businesses which support its 12-point economic policy, and from which the majority of its revenue originates.

“It should be remembered that, in Myanmar, most tax revenues are generated from Internal Revenue Department’s estimation of a business’s annual earnings in the following year. Thus, this proposal may align the government’s fiscal year with that of major tax-paying businesses,” he noted.

Mr Rose further argued that Myanmar should allow tax consolidation.

“As it is the case in Japan and the United States, it should permit tax consolidation, for international companies which are part of a group of businesses, with a permitted variance in the fiscal year of up to three months. Thus, in the event of different fiscal years between group units, their respective consolidated entries will not count transactions more than once,” he observed. This is rather important when tax revenues are set based on estimated business earnings during the following twelve months.

Mr Rose added that the change in the fiscal year should be accompanied by a similar change in the budgetary process, with multi-year budgeting.

“If this change signals that the government is willing to consider steps which will enhance its tax revenues, while, at the same time, align its policies with those of its major contributors to its revenues, then this is a positive step for Myanmar’s economy,” he remarked.

In contrast, Kyaw Htay, finance manager at Parami Energy, said that improvements in technology mean that the timing of the fiscal year no longer matters.

“Fiscal years are set according to socio-economic requirements of the country,” he said, explaining that the UK, and so did Myanmar, adopted April 1 to March 31 to avoid clashing with the major holidays of Christmas and New Year.

“Nowadays tremendous improve-ments in IT can overcome lots of manual handling delays. This means it doesn’t matter whichever fiscal years are adopted,” he said.

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