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Federal Budget 2018-19: Massive reforms ahead of the elections

Federal Budget 2018-19: Massive reforms ahead of the elections

Contrary to its populist appearance, Federal Budget FY19 is NOT a populist election year budget. It restricts non-filers of tax returns from purchasing all new motor vehicles, and property valued above PKR 4.0mn. Non-tax filers comprise 98% of Pakistan’s labor force. The budget introduces substantial punitive measures for concealment of foreign / domestic income / assets, thereby enhancing incentives to avail the amnesty scheme which has also been made a part of the finance bill, along with the measures to document the real estate sector. The budget also introduces measures to drive corporatization of businesses by introducing 5% tax advantage for corporations over AOPs by FY23 and reduction of income taxes on salaried and non-salaried individuals. The populist relief measures are confined to civil / military servants, overtaxed salaried individuals and corporate sector along with non-salaried individual taxpayers.

Positive for the market

Elimination of tax on bonus shares would be a big push to sentiments; so would the reduction of tax on un-distributed profits of companies with payout ratios less than 20% (previously 40%). However, change in status of withholding tax on brokerage income from final tax to adjustable solves only part of the problem as 0.02% withholding tax amounts to roughly 20% of revenues. Reduction in corporate tax rate and super tax by 1 pp per annum would provide relief to the profitability of the tax burdened corporate sector. The budget is positive for Banks, Fertilizer, Textiles, Media and Refineries; negative for Autos, Cements and Long Steel and Neutral to Positive for the rest of the market (due to reduction in super tax and corporate tax rate).

Key Reform Themes

1. Drive towards corporatization
2. Documentation of black economy
3. Punitive measures for non-disclosure of foreign income / assets in the amnesty
4. A shift from importer friendly to manufacturer friendly taxation system
5. Encouraging business friendly environment