The government may not increase tax on purchase of shares and presumptive withholding tax from the next fiscal year on the presumption that the stock brokers will resist the raise in levy and erase share prices, which have already received heavy battering this year. According to reports, the Central Board of Revenue (CBR) has proposed doubling of capital value tax (CVT) to 0.02 percent on purchase value and 0.01 percent on sale value. It is, however, believed that the new budget may not change the existing turnover tax.
Referring to the CBR proposal to double the presumptive withholding tax from 0.005 percent to 0.01 percent on the stockbrokers, Director, Equity Broking and Research at Jahnagir Siddiqui Capital Markets, Mohammad Sohail, said: "We believe that the probability of any increase is less this time."
"Since the equity markets are exempted from capital gains tax on the sale of shares till June 2007, we, therefore, believe no announcement is expected in this regard," he said.
According to him, the market has already received heavy battering and after touching its peak on March 16, it has moved down drastically losing more than 3,700 points because of stiff futures contract, margin rules, phasing out of badla system and high interest rates.
For the last couple of years, the market was flooded with pre-budget speculations about cut in the sales tax on commodities and corporate tax rate. "But we do not think any change would be made on this front in the 2005-06 budget. The proposal to increase gap between the tax rate of listed and the government may also ignore non-listed firms," he said.
He was of the opinion that the existing tax structure on dividend income was likely to continue.
NSS rates: After a sharp rise in the interest rate, there are logical speculations that the NSS rates would be adjusted upward in line with the PIB-yields.
To gain popularity, the government may announce an increase of two to three percent in selected saving schemes in the budget.
"We believe that the government will try to maintain status quo for the capital markets as the local bourses are still under the shock of March 2005 crisis. Thus, despite reports, we do not think any major change will be made on the turnover tax levied on investors and brokers.
"Moreover, better than expected collection of tax on share trading (expected revenue of rupees three billion against the target of Rs 1.6 billion) also justifies our assumption of no major change in the tax structure.
Hence, any expectation of reduction in the general sales tax (GST), corporate tax rate and levies on cash dividend would be unrealistic keeping in view strong corporate sector profitability, higher dividend pay outs and relatively lower tax collection by the government due to the subsidy on oil."
Increase in NSS yields and resultant rise in banks' deposit rates would divert some funds from the stock market to better yielding schemes and deposits.
Analysts are of the view that the effect of March settlement crisis and gradually phasing out of badla will move the market in the narrow band of 6700-7400 in the short run.
In the medium to long-term, Jahangir Siddiqui's stance on equities is positive. Robust economic performance, political stability, ongoing privatisation process and double-54digit profitability growth would continue to provide decent gains from the stocks. "We think that on an average a return of 20 percent is achievable from market.
The market, based on JS Universe, is trading at PE of 9.5x on FY05E and 8.4x on FY06F earnings with average dividend yield of 6.4 percent and 7.3 percent, respectively. The current PE of 9.5x is down by 39 percent from its recent peak witnessed on March 15, 2005. Despite the rising interest rates, a PE of around 10-11x is reasonable for the growing economy of Pakistan. Our Index target for the year-end (that is December 2005) is 8200 and for year-end 2006 it is 10000.