Pakistan Strategy: Populism trumps pragmatism, but only on face
Amidst a divisive macro outlook and heady budgetary imbalances, the PTI-led GoP introduced its second finance bill to a rancorous opposition, while alluding to approaching the IMF for the ‘final time’, something FM Umer and PM Khan have vowed to uphold
Market dynamics are expected to get a lift from i) abolishment of 0.02% WHT on share transactions, ii) capital loss carryover to be available for 3 years, iii) abolishment of tax on undistributed profits and iv) abolishment of super tax in FY20 on non-banking companies
From a sectoral perspective, proposals in the budget can be seen to favor SMEs (concessionary tax on loans), Automobile OEMs (FED on 1800CC+ CBU, removal of non-filer sales ban on 1,300CC below models), parts vendors, small scale manufacturers, construction concerns (incentives for low-income housing), agri-reliant (fertilizers, tractors, lenders), renewable energy equipment manufacturers (5YR tax holiday), group holding companies (group-relief partially reinstated) and fertilizers (GIDC reduction)
Market euphoria may, however, be tempered by Banking sector developments where despite specific tax concessions on finance income from advances to SMEs, agriculture and low income housing (20% tax rate vs. 35% currently), incidence of super tax at 4% on FY18 profits (previous: 0%) and increase to 4% in FY20 (previous: 3%) and FY21 (previous: 2%) may disrupt overall sentiment. The incidence of super tax will adversely impact our Banking coverage earnings by 6%-11% in CY19F
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