Budget falls short of expectations for stock market: traders

KARACHI: Traders and analysts are expressing their disappointment with the proposed federal budget, citing the lack of direct incentives for the stock market. Analysts said that the government had presented several targets, which were not achievable, including its revenue collection target. According to an initial analysis by Topline Securities, the budget seemed neutral for the local stock market.The International Monetary Fund (IMF) had previously emphasised the importance of aligning the budget with programme objectives. In the IMF Country Report on Pakistan from September 2022, a budget deficit of 4.0 percent of GDP and a primary surplus of 0.5 percent of GDP were projected for FY24. However, the government’s targets are a fiscal deficit of 6.54 percent and a primary surplus of 0.4 percent for the same period.

The IMF is also awaiting credible financing commitments and proper functioning of the foreign exchange (FX) market. Concerns arise regarding how the government plans to repay an estimated external loan of around $22 billion in FY24. This uncertainty would likely impact the local currency and interest rates, thereby affecting the stock market.

Several measures announced in the budget have implications for the stock market and key sectors. One such measure is the re-imposition of a 10 percent final withholding tax on the issuance of bonus shares by companies (20 percent for non-ATL). This move is expected to discourage companies from announcing bonus shares, which could negatively affect market trade volume. On a positive note, the minimum turnover tax liability on turnover has been reduced from 1.25 percent to 1.0 percent for companies listed on the Pakistan Stock Exchange (PSX). This reduction will benefit loss-making and low-margin companies.Regarding the super tax, it has been rationalised to apply to all individuals earning above Rs150 million. Three new income slabs have been introduced, and the tax rates for these slabs range from 6 percent to 10 percent. This change is expected to have a neutral impact.

In the previous tax year, the super tax of 10 percent was applied to specific sectors with income exceeding Rs300 million. However, affected parties went to court and were asked to pay only 50 percent of the tax.In the current budget, all companies with income above Rs500 million will be subject to a 10 percent super tax. Consequently, the tax rate for companies in this income bracket is now 39 percent, which is seen as negative for sectors not included in the list last year, said Topline Securities.

The government has maintained the current levels of capital gain tax (CGT) and dividend tax, which are expected to have a neutral impact too. Similarly, contrary to market expectations, no taxes have been imposed on reserves or retained earnings, also resulting in a neutral impact.The continuation of the fixed tax rate of 0.25 percent for IT and IT-enabled services exports for tax years 2024, 2025, and 2026 is viewed as a positive step that will benefit the market. Zafar Moti, former director of the PSX, expressed scepticism about the budget, criticising its achievability and its failure to address key issues such as the current account deficit and the availability of raw materials for industries.

He also raised concerns about the government’s heavy reliance on imported oil and its ability to fulfil its promises. Moti questioned the government’s credibility and speculated that they would soon approach the IMF for assistance. Khurram Schehzad at Alfa Beta Core questioned the logic behind the 0.6 percent tax on bank transactions, citing past negative outcomes and the expansion of the informal economy. He also criticised the taxation on bonus shares, stating its legal implications.

Schehzad raised further questions about the increase in pensions and salaries, especially considering the negative federal tax net after provincial shares. He wondered how the government would justify the budget to the IMF, given the challenges of achieving revenue targets with high inflation and low growth. He also highlighted the large gap between the tax target set for the previous year and the actual tax collection. Analyst Ahsan Mehanti at Arif Habib Corp acknowledged the budget’s favourable aspects for the IT sector, such as the promotion of IT exports and the development of the industry through duty-free imports of IT-related equipment.

He also mentioned that the increased tax exemption limit for home remittances would stimulate investments in the financial sector and real estate. Mehanti characterised the budget as equitable due to the imposition of the super tax on high-income earners. However, he noted the absence of direct incentives for capital market investors and the reimplementation of taxes on bonus issues.