'Direct Tax Code' seeks to completely overhaul and simplify the existing tax proposals, not only for individual tax payers, but also corporate houses and foreign residents.

Assuming the draft is implemented in the current form, there would be a drastic reduction in the amount of taxes each individual or business pays. The intent is, however, not merely to reduce the tax burden on tax payers. The Finance Minister also seeks to cut various exemptions and concessions. A wider tax base, higher tax compliance and economic growth should ensure that the effective direct tax revenue goes up. An efficient, uncomplicated, and equitable taxation regime is the cornerstone for good governance, and the stock markets usually view lower and stable tax rates positively.

While the code does away with several exemptions, the revision of tax slabs for individual tax payers and reduction in corporate tax rate would help both individuals and businesses to save significant amounts in tax. The resultant increase in disposable incomes would boost consumption, savings and investments, thereby aiding economic growth. The proposed trebling of the ceiling for savings/investments qualifying for tax deductions would also help lower the tax burden and encourage economically productive investments. Change in the tax treatment of such investments from the current EEE (exempt, exempt, exempt) method to EET (exempt, exempt, taxed) could be unpopular but is a step in the right direction, in my view.

On the flip-side, taxing long-term capital gains, which currently do not attract any income tax, and short-term capital gains, which currently attract 15% income tax, at the marginal tax rate would result in an increase in the tax outgo on capital gains. To avoid taxes on long-term capital gains, we could see a large number of investors booking profits on their stocks just before the new tax code is implemented in April 2011.

Taking a long-term view, however, treating capital gains no different from normal income would help to simplify taxation. Besides, the securities transaction tax (STT) would be withdrawn and the code proposes indexation benefits for investment assets held for one year or more.

As far as Corporate India is concerned, most companies would be favourably impacted by the reduction in tax rate and withdrawal of surcharge and cess. For MAT-paying companies, the shift from 17% of book profits to 2% (0.5% for banks) of gross asset value would result in varied impact. MAT-paying FMCG companies would benefit, as they enjoy high profit margins and high asset turnover. Asset-owning infrastructure companies, on the other hand, would have to pay MAT even in the initial years, when reported profits may not be meaningful. MAT-paying pharma companies may also witness increased tax outgo.

Over the next 6-7 years, India is on its way to the 'Next Trillion Dollar GDP'. What we created as a economy in the last 50 years will be recreated Motilal Oswal

in the next few years. This will provide significant nonlinear growth opportunities across sectors. The new direct tax code would further facilitate an increase in per capita GDP and provide a boost to multiple consumption themes-financial services, wireless telecom, cars, homes, branded jewellery, consumer electronics, processed foods, personal care products, to name a few. The penetration of a host of discretionary consumption goods is abysmally low as compared to the developed and other developing nations. Higher disposable incomes would help increase the penetration of such goods.

Large financial conglomerates are likely to be the biggest beneficiaries of the proposed increase in tax exemption savings limit from Rs 100,000 to Rs 300,000 per year. Among financial intermediaries, brokerages are likely to benefit the most due to: (1) abolition of STT, (2) likely increase in trading volumes immediately before the implementation of the tax code to avoid tax on capital gains, and (3) expected increase in flow of funds for domestic financial intermediaries like insurers and mutual funds. Withdrawal of tax benefits on housing loan interest could be moderately negative for banks and housing finance companies. However, higher disposable incomes and the resultant increase in demand for homes would be positive for these as well as real estate companies.