LAHORE - The federal budget 2015-16 has a clear focus on reinvigorating economic growth after two years of economic consolidation, as fiscal incentives for businesses including tax incentives for new industrial units have been announced in parallel with concrete steps for increasing the tax net, experts said. They said that Budget has been presented keeping one eye on the longer picture. Pakistan’s GDP is provisionally estimated to have increased by 4.24pc in FY15 with target for FY16 set at 5.5pc. FY16F sectoral contributions include 3.9pc for Agriculture, 6.4pc for Industries and 5.7pc for Services. Long term sustainable GDP growth is targeted at 7.0pc by FY18 underpinned by an increased focus on alleviating energy shortfall. Fiscal deficit for FY16 is targeted at 4.3pc compared to 5.0pc in FY15. The GoP is also targeting PKR 1.5tn expenditure under the National Development programme for FY16 with PKR 700b earmarked as the Federal PSDP.
The financial experts in a report released by BMA Capital stated that budget remained a positive event for Cements (higher PSDP allocation, tax incentives for downstream construction sector, reduction in EFF rates) and Textiles (reduction in LTFF and EFF rates, extension in benefits of duty drawback, maintain duty on machinery import at 0pc). However, a uniform 35pc tax on all sources of income of banks coupled with a higher TDR tax at 4pc has further added to the list of negatives for the banking sector. In Budget FY16, Govt. has allocated Rs112b under PSDP for power sector and plan to add 14,400MW to the National Grid by FY18 under which 10,400MW electricity will come from Pak-China Economic Corridor (CPEC). Govt. has also announced 47pc reduction in power subsidies to Rs118b (0.4pc of GDP) for FY16. Moreover, to encourage investment in power sector, Govt. has introduced relieve measures like, 1) exemption to electricity transmission projects for a period of 10 years, provided that the project is set up by June, 2018, 2) exemption from sales tax and custom duty on import of solar panels extended to Jun 2016, and 3) 5-year tax exemption has been granted for manufacturers involved in domestic production of solar and wind energy equipment.
Govt. has allocated total PSDP of Rs 1,513.7b, up 29pc than revised FY15 estimates (Federal PSDP of Rs700b, up 29pc). Various construction projects including small dams, highways, roads and power projects will be commenced in FY16 which will likely lift local cement demand. We expect local cement demand to post double-digit growth in FY16. Govt. has decided to impose 20pc import duty on Portland cement in order to protect local cement industry from cheap Iranian cement being dumped in Pakistan The Govt. has increased duty on import of coal from 1pc to 5pc while duty on import of PET coke has been increased from 1pc to 2pc. This will increase the final coal price for cement manufacturers, thereby affecting earnings of companies by 1-3pc in case players do not pass on the impact, we believe.
The Govt. has slashed Export Refinance Rate (ERF) from 6.0pc to 4.5pc and Long Term Financing Rate (LTFR) from 7.5pc to 6.0pc. This will have a positive impact on DGKC and MLCF amongst other companies in the sector, we believe.
In one of the relief measures to Khyber Pakhtunkhwa (KPK) province, the Govt. has given a 5-year tax holiday for companies establishing a new manufacturing unit during period of Jul 2015-Jun 2018. In cement companies, Cherat Cement (CHCC) had already achieved financial closure for its new cement plant in Jul 2014. If the new law is applicable on brining new production line during the said period regardless of financial closure, CHCC will get a huge relief from this development. To boost construction activities across Pakistan, Govt. has budgeted incentives like, 1) Mark-up (on housing loans obtained by individuals from banks/ other lenders) will be allowed to be adjusted up to 50pc of taxable income or Rs1mn, 2) Minimum tax on builders for the construction & sale of residential/ other buildings has been suspended for a period of 3 years, 3) Supply of bricks and crushed stone will be exempted from sales tax for 3 years up to Jun 2018, and 4) Duty on import of used construction machinery by registered construction companies will be reduced to 10pc.