My friend, Richard Murphy, has pointed out that India is planning to overhaul its tax code in a dramatic attempt to fight tax evasion and improve tax revenue. From the FT:

India’s government is planning a big shake-up of its archaic tax system in a bid to curb widespread evasion as it confronts a sharply widening fiscal deficit amid expanding social welfare programmes.

The plan, announced by Pranab Mukherjee, the finance minister, aims to foster greater compliance with tax laws by lowering key corporate and personal income tax rates, simplifying rules and eliminating exemptions blamed for eroding the tax base.

Corporate taxes on Indian companies will drop to 25 per cent from 30 per cent.

Personal income tax brackets will not change – peaking at 30 per cent – but income thresholds will increase significantly so that fewer taxpayers are pushed into higher brackets.

The government hopes that the new code – which must be still cleared by parliament before it can take effect in April 2011 – will encourage citizens to pay up.

Richard believes that this is a step in the right direction, and it probably is.  India clearly has a problem – as GFI’s recent report demonstrates, India ranks fifth among developing countries in illicit financial outflows with outflows averaging between US$22 and US$27 billion per year.   However, India’s plan does only address one aspect of their problem.  The larger problem – that of opacity in the global financial system – still needs to be addressed if India really wants to reduce their per annum capital flight numbers.

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