EUR 12.72 For Business Accounts Only

Pakistan Economy: Market Positive; Lacking on Revenue Measures

• earlier today announced the much anticipated mini-budget also known as Economic Reform Package (ERP). Contrary to expectations, the bill announced today had few revenue generating measures while it was more tilted towards giving relief to stock markets, local manufacturers, exporters, Small and Medium Enterprises (SMEs) and farmers.
• Though the announced reforms will be positive for local stock market in the short run, lack of measures to address the burgeoning fiscal deficit (6-7% of GDP expected in FY19) will likely limit any upside in medium to long term, we believe.

 

Key measures of the announced package are:

• Advance tax of 0.02% on share trading under Presumptive Tax Regime (PTR) to be abolished. This will likely create additional liquidity of around Rs1bn, based on the last 3 months average traded value. Further, Carry forward of capital losses on shares are allowed for 3 years.
• Group relief Inter-corporate dividend will be rationalized. Key beneficiaries are ENGRO, IGIHL, INIL, DAWH, KTML with 4-6% impact on bottom-line.
• Non banking companies Super Tax of 3% to be removed from July 2019. This will likely jack up our Topline Universe earnings by around ~2% average.
• No tax on retained earnings in case of non-payment of dividend. Previously companies were paying tax of 5% on  retained earnings if 20% payout was not maintained.
• Lower tax incidence of 20% on bank loans to SMEs, agriculture and low cost housing sector. Currently, banks are taxed at 35% with 4% additional super tax. This will likely to bode well for banks. Further, Interest free revolving fund facility of Rs5bn to be made available for low income housing scheme.
• Non-tax filers can buy cars of up to 1300cc (non-filers were previously not allowed to purchase vehicles) but will pay higher tax. This will be highly positive for auto sector, especially PSMC which caters most of the market of below 1300cc.
• Promissory note scheme to be introduced for exporters (available from Feb 2019) to address exporters’ liquidity.
• Gas Infrastructure Development Cess (GIDC) for fertilizer industry to be rationalized. Urea prices to be reduced by Rs200/bag. The bill to be presented to the Cabinet soon.
• Duty on diesel engine for agricultural applications to be reduced from 17% to 5%.
• Five year tax holiday on Greenfield investment coupled with exemption on duties on import of any relevant machinery (Jul 2019- Jun 2023).
• Withholding Tax (WHT) on cash withdrawals and deposits waived off for tax filers.
• Newsprint import duty to be abolished.
• SMEs to be exempted from submitting WHT every month and instead will submit only twice every year.
• Taxes on marriage halls to be reduced from Rs20,000 to Rs5,000.
• Import duty on industrial raw materials to be reduced. Imported machineries for Special Economic Zones will be exempt from tax.
• Renewable energy equipment manufacturer will be exempt from customs duty, sales tax and income tax for 5 years.
• Advance tax on sports franchise to be abolished from July 2019.
• Tax on low cost phones to be reduced while high end phone taxes is maintained.
• Rationalization of tax for commercial importers.