Budget FY 2018-19: Major incentives announced for the stock market

0
1544

LAHORE: The prayers of the Pakistan Stock Exchange have been answered as the government announced certain measures to appease brokers, entities and investors in the budget on Friday.

The government ignored the main proposal of the brokerages and other capital market stakeholders to decrease capital gains tax (CGT) but announced gradual decreases in corporation tax rates from 30 percent in the tax year 2018 to 25% in the tax year 2023.

The corporate tax rate will be 29% in the tax year 2019 and will be reduced by 1% each year up to the tax year 2023, said finance minister Dr Miftah Ismail while announcing the budget on Friday.

Also, a reduction in tax rate on undistributed profits has been announced from 7.5 percent to 5 percent and the condition of distributing 40% after-tax profits may be reduced to 20%.

For the promotion of real estate investment trust (REIT), the rate of dividends issued to the unit holders by REIT has been recommended to be decreased from 12.5 percent to 7.5 percent.

The super tax which got levied in 2015 for the rehabilitation of internally displaced persons (IDPs) and which continued in 2016, 2017 is currently being charged at 4 percent on banking companies & 3% on non-banking companies having income greater than Rs500 million.

It will be gradually decreased 1 percent per year from FY19 for both banking and non-banking entities but will continue for the rest of the outgoing financial year 2017-18.

According to Intermarket Securities research, “For the stock market, there are clear positives. Although CGT has seen no change and inter-corporate dividends ostensibly continue to face the tax, steps to eliminate bonus tax and reintroduce advance adjustable WHT on brokers are definite positives. At the same time, measures to improve tax collection in the property sector may potentially see some funds flow towards capital markets which could also serve to boost the KSE-100.”

It added “To the corporate sector, overarching steps are mainly positive. While Super Tax will continue for the next few years (at 3% for companies and 4% for Banks), it will be progressively reduced by 1ppt per annum and eventually eliminated. There are significant reductions in corporate income tax as well; after reducing from 35% in the last few years to 30% at present, companies will now see a 1ppt per annum reduction where the tax rate is envisaged at 25% by FY23. Lower corporate income tax rate will counter the impact of continuing super tax, especially for non-bank companies. “

“Further steps such as (i) extension in tax credit on BMR activities and (ii) lower threshold for minimum profit distribution are also encouraging for growth-oriented companies.”

The government also proclaimed that tax on bonus issues has been removed after being first levied in FY14.

According to an Intermarket Securities analyst “This is a sensible and much-needed move. Companies with cash-flow concerns e.g. PSO and gas utilities embroiled in circular debt, or companies in losses e.g. FFL, will likely avail this measure to compensate for low cash payouts. The measure will also be positive for banks.”

Advanced withholding tax on brokers has been made adjustable which was gathered from them at 0.02 percent previously.

Intermarket Securities in its observation about this move said “The previous Budget made advance adjustable WHT of 0.02% on brokers part of the final tax regime. This negatively impacted profitability for brokerage firms already facing a challenging environment. Reversion back to adjustable WHT would provide relief.”

Profit reached out to Capital Stake to know their take on the measures introduced by the government in the budget and how it could impact the stock market:

“The government had both political and economic targets to achieve in the budget 2019. It took several measures to try and increase the tax base and provide investors incentives to invest.

Capital Market: Positive

Measures for the Capital Market broadly look positive. Reduction in Corporate Tax by 1% each year until 2023 is expected to boost sentiments and so would the extension of tax credit allowed under 65B, 65D and 65E for new industrial undertakings till FY21. As mentioned in the budget proposals submitted by PSX, the government has abolished the 5% tax on bonus shares which may attract companies to issue bonus shares and also relaxed the mandatory payout rule. Brokers also received some relief.

Sector-wise:

Banks: Positive to Neutral

Increased government reliance on the sector to finance fiscal deficit, around 54% of the total, is likely to increase earnings.

Foreign losses cannot be adjusted against domestic income, is likely to have a negative impact.

Reduction in advance tax might increase volumes but extension in super tax shall keep earnings in check.

Cement: Slightly Negative

Around 60-70% of cement manufacturers cost of sales is made up of coal. The decrease in customs duty shall push earnings up so will the extension of a tax credit on BMR and expansion. But the increased in FED on cement would have an opposite effect. The increased PSDP is also not likely to have a huge impact on the sector sales as most of it is allocated to other heads.

Auto: Negative

Policies like not allowing non-filers purchase vehicles might dent volume of sales.

The government has taken steps to encourage use and sale of electric cars which will increase competition for existing players.

Steel: Negative

Increase in GST on steel, if unable to pass on to consumers, may hamper profits.

Textile: Neutral to Positive

Policies like zero-rated status, financing rates have been continued having no impact. While reduced VAT and GST might improve cashflows.

Fertilizer: Positive

Several measures have come up which are likely to have a positive impact on the sector. An increased tax credit, reduction in sales Tax on gas supply to fertilizer manufacturers from 10% to 5%,  imported LNG as feedstocks are proposed to be exempted from 5% Sales tax and there is also a reduction in sales tax on agriculture machinery.”