KARACHI: Based on initial analysis, the Federal Budget FY24 announced by the Finance Minister Ishaq Dar on Friday is neutral for the local stock market, analysts said.
International Monetary Fund (IMF) has already hinted that the budget should be consistent with program objective.
According to September 2022 IMF Country Report on Pakistan, IMF projected Budget Deficit of 4.0 percent of GDP and Primary Surplus of 0.5 percent of GDP for FY24, while the government is targeting a fiscal deficit of 6.54 percent and primary surplus of 0.4 percent for FY24.
Along with the Federal Budget, IMF is also waiting for credible financing commitment and proper functioning of FX market. It is yet not clear as to how government will repay external loan estimated at around $22 billion in FY24, Muhammad Sohail, leading analyst and CEO of Topline Securities said. This will drive the local currency and interest rates in FY24 and has implication to local stock market, he added.
According to Topline Securities’ research report, few of the key measures announced in the federal budget relating to stock market and key sectors includes;
Bonus: Re-imposition of 10 percent final withholding tax on issuance of bonus shares by company (20 percent for non-ATL). This will force companies to avoid announce investor favourite Bonus shares; thereby, affecting market trade volume and its impact would be negative.
Minimum Turnover Tax: Reduction of minimum tax liability on turnover from 1.25 percent to 1.0 percent for companies listed on PSX would be positive as loss making and low margin companies will benefit.
Super Tax: Rationalization of Super Tax under section 4C to apply on all persons across the board on income above Rs 150 million, insertion of additional three new income slabs of Rs 350 million to Rs 400 million, Rs 400 million to Rs 500 million and Rs 500 million above to be taxed at 6.0 percent, 8.0 percent and 10.0 percent, respectively, and its impact would be neutral.
In tax year 2022 persons engaged in automobiles, beverages, cement, chemicals, cigarette, tobacco, fertilizer, iron and steel, LNG terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceuticals, sugar and textiles had to pay a super tax of 10 percent where income exceeded Rs 300 million.
Affected parties later went to court and were asked to pay 50 percent of the tax. In the FY24 budget all companies with income above Rs 500 million will be required to pay a 10 percent super tax. Thus tax rate for companies above Rs 500 million is now 39 percent meaning that the measure is negative for all other sectors not mentioned in the list last year.
Capital Gain Tax (CGT): Government has maintained CGT at current levels and its impact would be neutral.
Dividend: Tax on dividend remained unchanged and its impact would be neutral.
Inter-corporate Dividend Taxation: No tax relief given on inter-corporate dividend tax. To recall, different trade and commerce bodies have proposed to remove taxation on inter-corporate dividends in order to promote corporatization and its impact would be neutral.
Taxation on Reserves/ Retained Earnings: Contrary to market expectation, Government has not imposed taxes on reserves/ retained earnings that would be neutral.
Additional tax on certain unexpected income, profits and gains: Government may impose up to 50 percent additional tax on any income, profit or gains that have arisen to any person or class of persons due to any economic factor or factors that resulted in unexpected income for any of the preceding five tax years from tax year 2023 and onwards that would be negative.
The extension of Income Tax exemption for one year, i.e., up to 30th June, 2024 for resident persons of FATA/ PATA was affecting steel rebar producers and it was expected that government may not increase this exemption. Its impact would be negative.
Incentive for Pharma Sector by including one more API and three drugs in the existing duty free regime would be positive.
Continuation of concessionary fixed tax rate of 0.25 percent for IT & ITeS exports for Tax years 2024, 2025 and 2026 would be positive.
Extension of exemption for one year granted to a person to profits and gains on sale of immovable property or share of special purpose vehicle to any type of REIT scheme, i.e., up to 30th June, 2024 will be positive.
Incentive for exporters of Information Technology (IT) and IT enabled services by allowing duty free import of IT related equipment equivalent to 1.0 percent value of their export proceeds will also positive.
Re-imposition of 0.6 percent advance adjustable withholding tax on non-ATL persons on cash withdrawal will be negative.
Reduction of Customs Duty from 10 percent to 5.0 percent on non-localized (CKD) of Heavy Commercial Vehicles (HCVs) will be positive.
Pakistan market is currently trading at a record low PE of 2.8x versus last 5-year and 10 year average PE of 7.2x and 8.1x respectively. “We think that this record low PE has incorporated to a larger extent high probability of debt restructuring,” Muhammad Sohail said.
Copyright Business Recorder, 2023
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