'Budget to eliminate tax exemptions, focus on undocumented sectors'

The upcoming Budget FY12 will eliminate tax exemptions and will focus on undocumented sectors to bring them in tax net, analysts said. They predict that the total budget outlay in FY12 is estimated at Rs 3.5-3.7 trillion up 6-12 percent from estimated budget outlay of Rs 3.3 trillion in FY11.
"With rising risk that foreign inflows may slowdown after the Abottabad incident, the Federal Budget FY12 is expected to favour consolidation for economic stabilisation", Muhammad Sohail, leading analyst and CEO of Topline Securities in his pre-budget report issued here on Monday stated.
He said that the overall theme will be to reduce fiscal deficit by eliminating subsidies and withdrawing tax exemptions in order to pave the way for IMF's remaining tranches of $3.2 billion. "This budget would have 'Neutral' implications for the stock market", he said. However, in case the government levies a tax on transaction in lieu of capital gain tax (CGT) it bodes well for the market and volumes if that tax is between 0.01-0.02 percent of share sale value.
This will provide impetus to record low volumes in cash and derivatives markets, which are at 9-year low at Rs 4.4 billion/day ($51 million) against Rs 30-51 billion/day ($500-850 million) in 2005-2007, he said. He believes that improvement in volumes can result in better tax collection. "If that happens the volumes can double thereby helping FBR in collecting taxes far better than what is estimated to be collected from CGT in FY11." Though Pakistan's relation with the outside world will remain fragile after Abottabad debacle, the report says that the new coalition at the centre can get much needed support for tax measures, a prerequisite for IMF funding.
He said that the investors' biggest concern remains low volumes. After the imposition of CGT, KSE's average volume is down 42 percent year-to-date (YTD) from FY10 to 99 million shares. This is the reason why the quantum of foreign flows is also being affected.
He said the GDP is likely to recover 4-5 percent next year (FY12) led by recovery in agricultural and manufacturing sector that were affected by floods last year. Regarding inflation, being the main problem area, he said it is expected to slowdown but will remain on the higher side between 12-13 percent below the expected 14.5 percent in FY11.
The external account will remain comfortable however current account deficit would widen to $3 billion (1.3 percent of GDP) as against an anticipated $0.5 billion (0.2 percent of GDP) in FY11, primarily on account of surge in oil import bill. The country's exports that are estimated to jump by 30 percent to $25.5 billion in FY11 will cool down to stand at $25-26 billion in FY12 after the recent fall in cotton prices, while workers' remittances are projected to cross $12 billion next year.
"Due to some control in government borrowing from central bank, comfortable current account and stability in inflation we think interest rates may not increase next year", he said. The international commodity prices, non-IMF flows and government fiscal discipline will be the key determinant of policy rate that jumped by 150bps in FY11. "Amid stability in external account position we expect Pak rupee to depreciate by 3 percent in FY12 against the green back as against one percent appreciation witnessed in FY11.
Regarding the budgetary impact on major sectors, he said its impact on Exploration and Production (E&P) is expected to be Neutral; on oil marketing companies and Refineries. 'Neutral'; on power sector 'Neutral to Positive'; on insurance 'Neutral to Negative'; on Banks 'Neutral to Negative'; on chemicals 'Neutral'; on cement 'Neutral'; on textile 'Neutral to Negative'; on telecom '.