The stock market participants are eagerly waiting for Budget 2009-10 to analyse what sorts of measures are being announced by the PPP-led government. With government eagerly wanting to increase the tax base amid the IMF agreement and economic slowdown, it is not appropriate to expect any major relief for any listed company, according to a pre-budget analysis made by Mohammed Sohail of Topline Securities.
However, he thinks that the market is trading at attractive levels as it has partially incorporated the budgetary measures and investors should focus on dividend yielding stocks. The government doubled the tax on buying and selling of listed shares three years back to 0.02 percent on purchase and 0.01 percent on sale value of shares.
He said that the crucial thing that stock investors are looking at is the status of turnover tax on share trading as there are speculations that in order to enhance the tax revenue the government may further increase the levy on share trading.
After the Cabinet meeting, the Information Minister also mentioned that four sectors including stock market would be brought into the tax net. But the interesting thing is that stock market is already under the tax net!
In fact there are market rumours that intra day traders would be taxed somehow that would affect the daily trading activity, as 60-70 percent of trades are not settled at local bourses.
Although the increase in turnover tax may not enhance the absolute collection of tax due to low volumes, but the final verdict in this regard would be announced in the budget speech which market players are anxiously waiting for, according to Sohail. The government has already exempted the capital gain tax on sale of shares till June 2010.
With limited fiscal space there are hardly any chances of reduction in corporate tax rate of 35 percent and general sales tax of 16 percent. Moreover, he believes that tax on dividend of 10 percent would likely to remain same. Compared to populist and relief-based budgets presented in the last few years, this time the economic managers are facing a challenging task. "The upcoming budget would most probably eliminate subsidies and try to broaden the tax net in order to curtail fiscal deficit and increase the tax-to-GDP ratio as agreed with the IMF," he said.
Regarding likely impact of the budget on key listed sectors, he said that no major impact is expected for the two heavyweight sectors that are oil and gas exploration and banking. Exploration companies like OGDC, PPL and Pakistan Oilfields may have no implications from the budgetary measures. These firms will keep operating as per the different exploration policies. However, measures to resolve circular debt may have some positive effect on their cash flows.
For banks some changes like withholding tax on fee income and some sort of levy on banking services may be imposed. But that will not affect banks' profitability substantially, he said. The government bank borrowing target may give some hint about the future trend of interest rate along with how much it will crowd out private lending.
The cement and fertiliser sectors may be the beneficiaries of the upcoming budget. The cement demand that remained depressed last year may increase due to higher allocation on development expenditure. However, maintaining of margins by cement firms is a major risk due to lower capacity utilisation.
In order to boost agriculture sector more credit and facilities would to given that will have a positive bearing on fertiliser companies, he added. Both the telecom and auto sector has been demanding reduction in duties and taxes. But considering the shortage of revenue no major step is likely from the new budget on these two sectors, Sohail said.
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