Markets cheer tax stability as industry voices concerns

KARACHI: Market analysts shared mixed reactions to the federal budget proposals presented in the National Assembly on Tuesday, with most welcoming its stability for capital markets but expressing concerns about its impact on local industries.

While appreciating, the government’s decision to maintain current capital gains as a stabilizing force for investor sentiment, market analysts warned that increased taxes on various sectors could stifle growth in local industries, particularly auto manufacturing.

Muhammad Sohail, CEO of Topline Securities, termed the budget’s unchanged Capital Gains Tax (CGT) and dividend tax rates as a positive development for the stock market. He noted that maintaining the current tax treatment avoids disrupting investor sentiments. Additionally, he highlighted other favourable measures, including the removal of tax exemptions for the FATA/ PATA regions and a reduction in super tax, which could improve corporate profitability.

Sohail emphasised that if the budget passes in line with IMF guidelines, it could serve as a catalyst for stock market re-rating, potentially lifting valuation multiples to their historic average of 7 times from the current 4.6 times.

The budget also introduced Section 114C, imposing restrictions on non-tax filers. These include limits on purchasing securities above a certain threshold, acquiring vehicles with engines exceeding 850cc, and opening Investor Portfolio Securities (IPS) accounts, except for Asan accounts.

Furthermore, the government raised the dividend tax rate to 25 percent for regular payouts and 15 percent for mutual fund distributions.

Sheryar Butt, a market analyst at Darson Securities, described the FY26 budget as largely market-friendly, with notable benefits for the fertilizer, banking, cement, and steel sectors. However, he warned that the auto industry could face headwinds due to increased duties and taxes.

JS Capital’s analysis revealed further tax modifications across asset classes, including an interest income tax hike from 15 percent to 20 percent (excluding National Saving Certificate instruments), maintained 15 percent CGT for equities, and a new 25 percent tax on loan income to encourage equity investments.

Research says that the real estate sector will benefit from abolished 7 percent commercial construction excise duty and a proposed federal stamp duty reduction from 4 percent to 1 percent, with provincial adoption anticipated.

According to Shahid Ali Habib, CEO of Arif Habib Corporation, the budget maintains the existing capital gain and dividend tax rates. Notably, tax rates for debt mutual funds increased from 15 percent to 25 percent, while equity mutual funds remain at 15 percent. This change favours equity investments, making the stock market a more attractive option.

In contrast, Mashood Ali Khan, another commentator, expressed strong reservations, stating that the budget closely mirrors IMF recommendations without addressing structural issues in local manufacturing. He predicted a disastrous year for auto and ancillary industries, leading to a surge in import bills.

Experts agree that overall while the budget provides stability for capital markets, its broader economic implications, particularly for manufacturing and auto sectors, remain a point of contention among them.

Copyright Business Recorder, 2025