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Federal Budget'24 - Road to Nowhere, (AKD Research, Jun 10, 2023) - Detailed Report

AKD Federal Budget FY24

Road to Nowhere

 

Budget’24 – Mundane at best: Budget’24 has been presented keeping two objectives in view i.e. i) to bring IMF on board and ii) avoid the pitfalls of an election year budget. While the budget succeeds in its latter objective, how much success does it meet with regards to the former remains to be seen. Overall, we think Budget’24 is unimaginative, lacks concrete substance and uses the old tried mundane methods which really haven’t ever been successful.

 

Regressive steps aplenty in Budget’24: Market aside, ask any fundamental analyst or accountant what changes on account of bonus shares? Nothing changes fundamentally, yet instead of incentivizing domestic Capital Markets as a medium through which future capital raising can be done, successive governments have moved in the opposite direction with the current set-up introducing a 10% tax on bonus shares (20% for non-ATL). Tax on cash withdrawals (albeit for non-filers) has been re-introduced which is clearly regressive from a documentation stand point – Not the way to go about if one is concerned about documenting black economy.

 

Taxation – Milking the already milked cow: Super tax at income above PkR150mn has been continued, however, new slabs have been introduced with the peak slab being all companies/individuals having income exceeding PkR500mn being taxed an additional 10%. Measures for increasing documentation and increasing tax net appear to be missing while the easy solution of milking the already taxed, particularly Corporates has been adopted. At 39% for Corporates (29% tax + 10% super tax) and 49% for Banks (39% tax + 10% super tax), Pakistan has one of the highest taxes in the world and the highest in the region – quite a dis-incentive for foreign entities to invest and set up shops in the country.

 

Windfall tax on extraordinary income - gonna hurt Banks and Commodity trading businesses: The govt. has introduced additional tax (up to 50%) on income arising from extraordinary gains resulting from exogenous factors i.e. international price fluctuations, commodity market changes or currency fluctuation. As per our understanding , the scope of this tax will be the previous 5 years in any tax year as the Finance Bill uses the words ‘preceding 5 years tax from tax year 2023 and onwards’ for this section. As such, extraordinary FX income generated by Banks in CY22 are likely to become a part of this where we can expect heavy taxation within the banking sector as a consequence. Also, FX and inventory gains particularly for Commodity trading businesses (OMCs, Foods, Steel et al) will be taxed heavily as a consequence of this provision.

 

GDP growth at 3.5%; interest payments exceed net receipts: For FY24, the GoP projects GDP growth at 3.5% which will likely be contingent on how soon Pakistan re-enters the IMF fold. Further delays and given our precarious Reserves situation, administrative controls will be the order of the day resulting in continued slowdown, having domino effects on GDP growth and tax collections. At the same time, cumulative interest payments for FY24 are projected at PkR7.3tn, exceeding net federal receipts at PkR6.9tn. This in itself is the biggest problem for the country right now. Unfortunately, the budget lacks any concrete steps to stem the bleeding at the Center, which will continue to result in a precarious situation in the years ahead. 

 

Winners – the list is far and few: From a budgetary perspective, Budget’24 has largely negative connotations for the broader market as well as the different sectors (super tax, tax on bonus). That said, budget is positive for Cements where for incentivizing construction activity, tax liability reduction has been provided by 10% or PkR5mn / PkR1mn (whichever is lower) for builders/individuals engaged in construction of houses, applicable for three years. Budget is also positive for Glass & Ceramics (Increased RD to 30% from 15% on imported glass and related products) and Autos in theory at least (withdrawal of cap of fixed duties /taxes on old Asian make vehicles above 1300cc).

Budget is mixed for OMCs (introduction of bonded storage bulk facility is theoretically positive; windfall tax is negative), Neutral for Fertilizers, Power and Tech (continuation of concessionary fixed rate of 0.25%). Budget has negative connotations for Banks (windfall tax) and Textiles (sales tax on POS retailers enhanced to 15% from previous 12%).

 

AKD Research