EUR 21.44 For Business Accounts Only

Pakistan Budget FY20: Initial Impressions

 

• Pakistan Minister of State for Revenue  announced federal budget for FY20 today in national assembly of Pakistan.
• We think that this tax heavy Budget (targeting over 35% growth in FBR Revenue) is aimed at providing the much needed stabilization and to fulfill IMF conditions (prior action).
• has set Current Account Deficit (CAD) target of US$6.5bn for FY20 vs US$13bn in FY19 down 50%. While primary deficit target is in line with IMF demand of 0.6%. The Govt’s target for budget deficit is 7.1% (or Rs3.1tn) for FY20 as compared to close to 7.4% expected for the current fiscal year (FY19).
• GDP growth target has been set at 4.0% for FY20 as compared to 3.3% (9-year low) in FY19. This will be achieved through  growth of 2.9% in Agriculture, 2.0% in Industry and 4.8% in services (these were at 0.8%, 1.4% and 4.7%, respectively in FY18). Based on our initial estimates we expect GDP to grow by 3.5% in FY20
• Total budget size for FY20 is estimated at Rs7tn. This is an abnormal 30% higher than the last year’s revised budget outlay of Rs5.4tn mainly led by much needed revenue growth.
• FBR Revenue for FY20 is anticipated at Rs5.5tn, which will be higher by over 35% from FY19 level.
• Though tax target seems on the higher side but considering tax measures announced in the Budget, an above average growth of 15-20% is likely. This along with reduction in development expenditure will help in reaching closer to IMF agreed primary deficit target in FY20
• Proposed Federal Public Sector Development Program (PSDP) for FY20 is Rs950bn, as compared to revised PSDP for FY19 of Rs500bn (as against initial target of Rs800bn).
• Interest payment has been budgeted at Rs2.9trillion up 50%. This will be 43% of total revenue far higher than x year average of 31%.
• For the first time Defense expenses has been kept constant while civil government expenses has been cut by 6%
• Reduction in corporate tax rate by 1% a year announced in last budget of PML-N Govt. has been reversed as expected. New corporate tax for FY20 and FY21 is now 29% for non banks. Banks tax remained at 35%
• No changes made in Super Tax
• Capital Gain Tax (CGT) and tax on dividends (except for IPPs dividend tax) has not been changed, in line with our expectations.
• Turnover tax is increased from 0.2-1.25% to 0.25-1.5%. This will be negative for companies/sectors having thin margins like chemicals, OMCs and consumers. Further, steel and cement companies may also fall in this region given uncertainty on their future profits.
• Contrary to expectations, there is no increase in General Sales Tax (GST). Standard GST rate is maintained at 17%.
• Tax credit of 10% allowed for new investments is reduced to 5%. Which we believe will be negative for cement sector as almost all payers have increased their production capacities. Further, glass manufacturers may also be impacted from this.
• Tax on fixed income has been increased and has brought in line with 15% tax on dividend and gain tax on sale of shares. This is indirectly Positive for equities.
• Similarly taxes and valuation on property has been revised and tightened which bodes well for stocks.