Budget: tax heavy for equity investors

The federal budget 2017-2018 announced by the finance minister Ishaq Dar has turned out be an anti-climax for the stock market participants who were expecting positive announcements. On the contrary, more taxes have been imposed both on the investors and the companies.

Prior to the announcement of the budget, there was a lot of buzz in the market with expectations that this time around the government would announce measures aimed at increasing market activity in light of Chinese 40 percent stake acquisition of the Pakistan Stock Exchange and the upgrade to emerging market status.

Across the board, the investors, companies and even the regulator were of the view that tax on bonus shares needs to be either completely removed or to be imposed just on par value. The finance bill has not addressed this issue at all.

What the government and the tax department did address though were their shortcoming in increasing the overall tax base by imposing more tax on investors in terms of dividend income directly from companies and from mutual funds as well. To support this measure it has also been proposed to impose 10 percent tax on companies who pay-out less than 40 percent of their earnings. This measure is although good for minority shareholders as they will get more dividends especially from textile and cement companies but it could also hamper companies who are holding on for future expansions.

However, the biggest ever PSDP allocation in the budget can be a silver lining for investors. Dams, power projects, highways, pipelines need to be built. These activities will keep the demand for cement, steel and other related raw material on the upside. The increase in FED on cement bags and sales tax increase on steel companies is most likely to be passed on to the consumers.

The lagging sectors of the market such as agriculture and textile have also been given favourable policies. Farmer loans and reduction in tax on DAP would give support to the fertilizer scrips. But the fertilizer companies may face some pressure on urea margins, as GST reduction alone will not be sufficient to maintain rates at current levels.

Textile rebates and export incentives should start to kick in after July, which could have a positive impact on textile exports. Tax on new listings has also been extended which should encourage new listings.

Commenting on the budget impact Mohammad Sohail, CEO of Topline Securities, expects a slight drop in the market and is of the view that MSCI flows that are expected next week would revive the sentiments again.

Overall, the budget proposals have a ‘milking the cow’ aspect to it as far as the stock market is concerned. The prime objective should have been to attract more people towards investing and not drive them away by imposing more taxes.