LAHORE - Despite news of increase in Capital Gains Tax (CGT) rate in Budget FY16, the KSE-100 Index rose by 2.9pc WoW to close at 34,012. During the week, average daily volumes increased by 70pc WoW to 316mn shares while average daily value rose 35pc WoW to Rs13b (US$127.1m). Amongst key sectors, major gains were seen in Beverages 12pc, Engineering 6pc, Personal Goods 6pc, Life insurance 5pc, Cement 4pc and Chemicals 4pc while major fall was seen in Tobacco 7pc, Media 5pc and Fixed Line Communication 1pc.
The government unveiled its third budget during the week with an outlay of Rs4,451b (+3.5pc YoY), aligned towards growth and containment of fiscal deficit. Encouragingly, government announced measures to promote growth (FY16 GDP growth target of 5.5pc vs. FY15 GDP growth of 4.24pc, where development budget has been jacked up to Rs1,513b. Federal PSDP component of the development budget has been set 29pc YoY higher at Rs700b versus revised FY15 PSDP allocation of Rs542b. Measures have also been announced to promote construction, energy and agriculture sectors. In order to achieve the targeted growth, government eyes 3.9pc growth in agriculture, 6.4pc growth in industry and 5.7pc growth in services. Meanwhile, measures (higher tax on capital gains and dividend income of banks, promotion of housing credit etc.) have been taken to facilitate credit offtake to support government’s growth plan. In line with larger belief, government also introduced/hiked taxes on certain sectors to contain fiscal deficit. Government intends to bring fiscal deficit down to 4.3pc in FY16 from 5pc in FY15.
According to experts, from the market’s vantage point, the budget announcement was largely negative. Government hiked Capital Gains Tax (CGT) rate to 15.0pc from 12.5pc on holdings less than one year and to 12.5pc from 10pc on holdings greater than one year but less than two years. Government has also introduced a new tax slab, where CGT of 7.5pc will be charged on holdings greater than two years but less than four years. Moreover, the government has also proposed to increase tax on dividends to 12.5pc from 10pc for filers and to 17.5pc from 15pc for non-filers (5pc shall continue to remain adjustable). For Mutual Funds the existing rate of 10pc shall continue.
On the positive front though, it has been proposed to impose tax on companies not distributing dividends. Other than a scheduled bank or a modaraba, companies which do not distribute cash dividends within six months at the end of the said income year or distributes dividends to such an extent that its reserves, after such distribution, are in excess of hundred percent of its paid up capital, the excess amount may be taxed at the rate of 10pc. Experts believe, this will either raise cash payouts of such companies or speed up expansion plans (energy companies, particularly PSO, OGDC can see higher payouts). That said it can turn counterproductive as companies may prefer to take a tax hit than payout higher cash dividends. Moreover, in line with expectations government cut corporate tax rate by 1pc to 32pc.
Sector specifically, heavy-weight banking sector is likely to take a significant hit. It has been proposed all sources of income of the banking companies will be charged a flat tax rate of 35pc vs. various different tax rates applicable presently. Our back of the envelope working suggests 3-8pc impact on banking sector’s profitability, with National Bank of Pakistan (NBP) and Allied Bank Limited (ABL) likely to be affected the most. Moreover, one-time tax of 4pc will be levied on banking companies for Rehabilitation of Temporarily Displaced Persons (TDPs) versus 3pc for all others companies, individuals and association of persons earning more than Rs500m in tax year 2015.
Experts are of view that Textiles and Cements have emerged as key gainers. For textiles, (1) EXIM Bank of Pakistan will start operations in FY16 to facilitate exporters, (2) Export refinance rate has been cut to 4.5pc from 6.0pc, (3) Long Term refinance rate has been cut to 6.0pc from 7.5pc, (4) benefit of duty drawback of local taxes and levies scheme will remain available for FY16 and (5) customs duty on import of textile machinery will remain zero in FY16 as well, has been proposed among other measures. Moreover, sales tax for export-oriented sectors has been increased to 3pc, 3pc and 5pc vis-a-vis 2pc, 3pc, and 5pc previously; however is better-than-expected flat 5pc sales tax. Outstanding tax refunds, relating to tax periods till May 31, 2015, will be cleared by August 31, 2015.
For cements, (1) 29pc YoY higher PSDP allocation (though Rs100bn relate to TDPs) and (2) incentives for construction sector including housing credit, suspension of minimum tax on builders, exemption of Sales Tax on bricks and crushed stone and reduction in customs duty on import of construction machinery bodes well. Focus on construction of highways in development plan will favor Attock Petroleum Limited (APL) in experts view.