The new budget would be maintaining the status quo with a neutral, or neutral to positive, impact on major listed sectors, analysts said. In a post-budget research paper, analysts' team of Topline Securities suggested neutral impact of the budget on the stock market, E&P, refineries, IPPs, OMCs, banks, chemicals, telecom, textile and fertiliser sectors, and 'neutral to positive' on insurance and auto assemblers, and that its impact would be positive on the cement and consumer sectors.
Stock Market: Budgetary measures:
--- Individual investors will continue to pay 10 percent CGT, if shares sold within 6 months and 8 percent between 6 and 12 months.
--- Banks, insurance firms, mutual funds and other corporate entities will continue to pay CGT as per their specific rules/ordinance, and there is no change in this budget.
--- Quarterly CGT filing deadline for corporate has been extended to 21 days from 7 days.
--- No major changes made on the turnover tax on shares trading and taxes on stock brokers.
--- For individuals investing in IPO, present tax credit limit of Rs 300,000 or 10 percent of taxable income is now raised to Rs 500,000 or 15 percent whichever is lower, if those shares are held for at least 36 months.
--- Discontinuation of 15 percent flood surcharge imposed in March 2011 on companies' profits. Thus, listed companies will pay 35 percent corporate tax in FY12 compared to average tax of 38 percent (including 40 percent imposed in last three and a half months of FY11).
--- Enhancing tax rebate to 15 percent from 5 percent for the year in which the new company is listed. That is the new company coming for listing will pay 29.75 percent rather than 33.25 percent in the first year of listing.
--- 100 percent tax credit on corporate industrial undertakings which are 100 percent equity financed up to 5 years after commissioning. The same will be applicable for new BMR activities.
--- Sales tax reduced from 17 percent to 16 percent. This will help to curb high inflation, to some extent, and thus interest rates in the economy.
--- 10 percent final tax on individual investors on investment in T-bills and PIBs will help in the development of debt market and will help in attracting foreign investment in government papers. This will shift some funds away from the equity market.
"Although the initial reaction at Karachi bourse would be negative, it was expected that the government may give relaxation to retail investors in CGT after failing to receive any substantial revenue due to 8-year low volumes", Muhammad Sohail, leading analyst and CEO of Topline Securities, said.
After the recent round of meetings with Ministry of Finance and FBR, it was expected that CGT may be deferred, at least for the individual investors who have been deserting the market causing volumes in FY11 to decline to 8-year low of Rs 4 billion a day, down 50 percent from last year.
"This will not only affect the market depth and volumes but will also have adverse implications to the government plan to privatise its units through the stock market", he added. The trend of IPO, that slowed down last year with only one offering (versus 10 IPOs a year on an average), will remain affected thereby having impact on the capital formation.
"We expect the market to react negatively on the first day after budget by 100-200 points, unless some confidence-building comments in this regard are made by Finance Ministry officials", he said. Pakistan's once vibrant and actively traded Karachi bourse, that used to trade Rs 40 billion a day in cash (Rs 28 billion) and single stock futures (Rs 12 billion) on an average, is on the verge of losing its once famous slogan of most liquid market of Asia, and the government has totally ignored this market, once again.
However, the budget will have some positive effects also in the medium term as mentioned in the accompanying measures taken by the government. But due to dull volumes which are at 10 percent of average volume seen in middle of this decade, the price discovery will be affected thereby creating hurdles for companies to raise capital through right issues and new offerings.
The overall impact on stock market would be 'neutral', he said. E&P, Refinery, IPPs and OMCs: Budgetary Measures:
--- While no major steps taken to eliminate circular debt, the govt is targeting lower electricity subsidy of Rs 148 billion in FY12, compared to actual subsidy of Rs 229 billion in FY11.
--- This means that the government is planning to gradually increase power rates, which would improve the cash flows of energy chain.
--- Reduction of 1 percent GST on power rates and oil products is likely to be passed on.
--- Deemed duty, the major profit driver of refineries, remains at 7.5 percent on diesel.
--- Petroleum levy (PL) target of Rs 120 billion for FY12 is higher than likely collection of Rs 70 billion in FY11. Either the government will not pass on the impact of decline in global oil prices or it will end up collecting lower amount in PL.
He said that the lower subsidy allocation signals towards rationalisation of the power tariff which is at the core of the circular debt. However, the actual outcome would be dependent upon implementation energy sector reform. Therefore, all-in-all, the new budget has no major implications for heavyweights in E&P, OMCs, IPPs and refineries, and its impact on these sectors would be 'neutral'.
Banks: Budgetary Measures:
--- WHT of 0.3 percent on pay order, demand draft, etc reduced to 0.2 percent.
--- Contrary to media reports, no change in corporate tax on banks.
--- No change in taxation on investment in government papers.
--- Rate of tax increased to 20 percent from 10 percent on dividend received by banks from AMCs (Asset Management Companies). This will not have a major impact as investment in AMCs is nominal. If that means banks' investment in funds then banks need to hold their investment for more than 1 year to minimise their tax liability as CGT on banks for more than a year is 10 percent which is less than 20 percent on dividends imposed in this budget.
--- Banks allowed carrying over of provisioning in excess of 5 percent on consumers and SME loans. He said that the reduction in WHT is expected to improve deposit base slightly govt reliance to finance 84 percent of Rs 850 billion deficit from local sources mean more dependency on local bank and non-bank borrowing that will keep interest rate high and resultantly NIM will remain strong. Similarly, the carryover of bad debts in excess of 5 percent would be slightly positive for the banking sector. The overall impact on banks would be 'neutral', he said.
Insurance: Budgetary measures:
--- Individuals investing in life insurance policies will now get tax credit on income tax on amount of premium up to 15 percent of taxable income or Rs 500,000 whichever is lower.
--- No change in capital gain tax regime for the insurance sector. He said that the tax credit given on life insurance premium bodes well for the entire life insurance sector to penetrate further which is in its infancy. Moreover, the adversities created on enhancing corporate tax bracket for the insurance sector has been the diluted since no change was made in this regard. The impact on insurance sector would be 'Neutral to Positive', he said.
Cement: Budgetary Measures:
--- FED reduced by Rs 200/ton (Rs 10/bag) to Rs 500/ton.
--- SED which was increased to 2.5 percent (Rs 7-8/bag) in March '11 is completely removed.
--- Reduction in GST from 17 percent to 16 percent would reduce bag prices by Rs 3-4/bag.
--- Increase in PSDP to Rs 730 billion and plans to complete old projects will increase cement demand in FY12.
--- Government allowed 100 percent tax rebate on BMR or industrial undertaking which are 100 percent financed by equity.
He said that the cut in FED, removal of SED and 1 percent reduction in GST would have a cumulative impact of Rs 21/bag (Rs 420/ton). Initially, the companies will pass on the benefit to end-users. However, this will provide room for increase in cement prices, going forward, to cover the inflationary costs. Theoretically, if gains are not passed on it would improve LUCK and DGKC bottom-line by 18-37 percent in FY12, while higher allocation of PSDP and its effective materialisation along with 100 percent tax rebate also bodes positive for the sector. The impact on cement sector would be 'Positive', he said.
Chemicals: Budgetary Measures:
--- There was no change in customs duties on imported PTA. Hence, the protection remained at 3 percent.
--- 100 percent tax rebate allowed on BMR and other industrial undertakings, if completely financed by equity. He said that the budget is a 'non-event' for Lotte Pakistan as customs duty has remained intact. This 3 percent protection means a benefit of $36 a ton to Lotte Pak will remain the same, while 100 percent rebate on tax liability for expansion or BMR through equity would also bode positive for the company and the impact on Lotte Pak would be 'neutral'.
Telecom: Budgetary Measures:
--- Government target revenue collection of approx Rs 75 billion from issuance of 3G licences.
--- GST on telecom services maintained at 19.5 percent. "Keeping in mind the limited market of the 3G, we believe that the cellular companies will remain hesitant to acquire 3G licence from the government", he said. Thus, the overall, the budget remained a 'non-event' for the telecom sector.
Auto Assemblers: Budgetary Measures:
--- No change in regulatory duty (50 percent on 1801cc and above) or customs duty on imported used and new CBUs.
--- Duty structure of CKDs remains the same.
--- SED, which was increased to 2.5 percent in March '11, is completely removed.
--- 1 percent decline in GST on car automobile sales from 17 percent to 16 percent.
--- No change on WHT on car purchase.
--- Furthermore, there was no decision made on finalisation of new entrant policy, which would have dampened sector profitability. He said removal of SED and lower GST would mean that cars would now become cheaper by 2-3 percent, approximately. This will help in improving the sales volume and will help car assemblers to easily pass on the cost to consumers in future. And the impact on the auto assemblers would be 'neutral to positive'.
Textile: Budgetary Measures:
--- The sales tax on local supplies of textile products was standardised to 5 percent, instead of 4-6 percent, on yarn and processed cloths.
--- 100 percent tax rebate on BMR or industrial undertaking financed by equity.
"With standardising sales tax on local supplies of yarn and process cloths, there would be no impact on sector profitability", Sohail said. Tax rebate would be positive for the textile as most small BMR and expansions (looms and machinery) are financed through equity and the overall impact on textile sector would be 'neutral'.
Fertilizer: Budgetary Measures:
--- No change in feed gas prices seen in budget FY12.
--- In line with other sector, 1 percent GST was also reduced on fertiliser products (urea and DAP).
--- Enhancing tax rebate to 15 percent from 5 percent for the year in which the new company is listed. That is the new company coming for listing will pay 29.75 percent rather than 33.25 percent in the first year of listing.
"Despite much hype about the removal of subsidy on feed gas by rationalisation of gas tariffs, there was no change in feed gas prices", he said. The 1 percent reduction in sales tax will lower the urea and DAP prices by Rs 12-Rs 40 per bag. Moreover, the tax rebate on new listing will bode well for Engro's upcoming listings. The impact on fertiliser sector would be 'neutral', he added.
Consumer: Budgetary Measures:
--- 1 percent reduction in sales tax on all consumer items, which used to attract 17 percent GST.
--- Milk and other packed food items remained exempted from sales tax. He said the reduction in GST by 1 percent would somewhat ease the inflationary pressure, and thus improve the aggregate demand for FMCGs. Moreover, exemption of sales tax on packed milk and other food items bodes well for the FMCG companies like Engro Foods, Nestle and others. The impact would be 'positive', he added.