The federal budget for the fiscal year 2023-24 is neutral for the local stock market, based on the initial analysis conducted by Topline Securities.
The International Monetary Fund (IMF) has already hinted that the budget should be consistent with program objectives. According to September 2022 IMF Country Report on Pakistan, IMF projected a Budget Deficit of 4.0 percent of GDP and a Primary Surplus of 0.5 percent of GDP for FY24, the report stated.
The report noted that the government is targeting a fiscal deficit of 6.54 percent and a primary surplus of 0.4 percent for FY24. Along with the budget, IMF is also waiting for credible financing commitment and proper functioning of the FX market.
It is yet not clear how the government will repay the external loan estimated at around US$22 billion in FY24. This will drive the local currency and interest rates in FY24 and has implications for the local stock market, said the report.
Key Measures for Stock Market in Budget
A few of the key measures announced in the budget relating to the stock market and key sectors include:
- Re-imposition of 10 percent final withholding tax on issuance of bonus shares by the company (20 percent for non-ATL).
- This will force companies to avoid announcing investor-favorite Bonus shares thereby affecting market trade volume.
Minimum Turnover Tax
- Reduction of minimum tax liability on turnover from 1.25 percent to 1.0 percent for companies listed on PSX. Loss-making and low-margin companies benefit.
- Rationalization of Super Tax under section 4C to apply to 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 percent, 8 percent, and 10 percent respectively.
- In the 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, read the report.
Capital Gain Tax (CGT)
- The government has maintained CGT at current levels as per initial understanding.
- Tax on dividends remains unchanged as per the report.
Intercorporate Dividend Taxation
- No tax relief is given on intercorporate dividend tax. To recall, different trade and commerce bodies have proposed to remove taxation on intercorporate dividends in order to promote corporatization.
Taxation on Reserves/Retained Earnings
- Contrary to market expectation, Government has not imposed taxes on reserves/retained earnings.
Additional tax on certain unexpected income, profits, and gains
- The 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 the tax year 2023 and onwards, added the report.
- Extension of Income Tax exemption for one year i.e. up to 30 June 2024 for resident persons of FATA/PATA; This exemption is affecting Steel rebar producers and it was expected that government may not increase this exemption, the report observed.
- The incentive for the Pharma sector by including one more API and 03 drugs in the existing duty-free regime.
- Continuation of a concessionary fixed tax rate of 0.25 percent for IT & ITeS exports for Tax years 2024, 2025, and 2026.
- The report mentioned the extension of the exemption for one year granted to a person to profits and gains on the sale of immovable property or share of special purpose vehicle to any type of REIT scheme i.e. up to 30th June 2024.
- The report noted that the incentive for exporters of Information Technology (IT) and IT-enabled services by allowing duty-free import of IT-related equipment is equivalent to 1 percent value of their export proceeds.
- Re-imposition of 0.6 percent advance adjustable withholding tax on non-ATL persons on cash withdrawal.
- Reduction of Customs duty from 10 percent to 5 percent on non-localized (CKD) Heavy Commercial Vehicles (HCVs).
According to the report, the Pakistani market is currently trading at a record low PE of 2.8x vs. last 5-year and 10-year average PE of 7.2x and 8.1x respectively. The report determines that this record low PE has incorporated to a larger extent high probability of Debt Restructuring.