Contrary to market expectations, measures announced in Federal Budget FY23 are being termed ‘Neutral to Positive’ for the stock market. With IMF program in sight, there was a general expectation that there may be very tough measures across all sectors. However, the government has announced a mix of positive and negative measures for listed sectors.
Some of the key measures announced in budget relating to stock market and sectors include:
Tax on all persons including companies and AOPs where the income exceeds Rs300 million are now subject to an additional tax at the rate of 2% of such income. This is likely to impact profitability of the listed companies by around 4%.
Tax rate on banking companies has been increased from 39% to 42% including additional 3% super tax. This is likely to impact profitability of banks by around 5%.
Tax credit on available on mutual fund investment has been withdrawn. Though, a lot of people avail tax credit by investing in fixed income mutual funds, this may be Neutral for stock market as analysts see some redemptions from equity mutual funds with some of such amount may directly be invested in stock market.
Sales tax on Fertilizer products is proposed to be increased from 2% to 10%. Analysts believe that this will be Neutral to Positive for Fertilizer sector as it will result in lower piling up of sales tax receivables as they are paying 5-17% sales on input/raw material. Increase in Fertilizer product prices will easily be passed on to consumers as it is already selling at huge discount to international prices.
Tractors have been exempted from sales tax of 5% which will be slightly positive for the sector.
Government has increased taxation on immovable property which will be positive for stock market sector. It has been a long demand of stock market stakeholders to the government for provision of a level playing field for all sectors in economy where huge concessions given to other sectors should be withdrawn including the property sector.
Duty on import of Electric vehicle in CBU condition will now be reduced to zero as compared to previous duty rate of 12.5%.
Government has set an ambitious revenue target of Rs7 trillion in FY23 budget which is up 17% YoY. This is based on optimistic estimates of collection in Petroleum Levy (PDL) and Gas Infrastructure Development (GIDC). It is also interesting to note that the revenue target of Rs7 trillion is slightly lower than the numbers quoted in news reports of Rs7.25 trillion prior to budget as demanded by IMF. The Government has set PDL collection target of Rs750 billion (Rs30/liter on Petrol/Diesel) for FY23 considering the current oil price scenario seems difficult to achieve.
The government is still giving a subsidy of Rs9/liter and Rs23/liter on Petrol and Diesel even after recently increased petroleum product prices by 40%. To note, in 9MFY22, The Government collected Rs126 billion from petroleum levy. Tax collection from petroleum continues to remain a key revenue contributor as around 22% of total tax collection by government.
Similarly, target of GIDC for FY23 is set at Rs200 billion which is also less likely to be achieved. The Government has only collected Rs14 billion of GIDC in 9MFY22 as companies have taken a stay order on payment of GIDC. Provincial surplus is also estimated at Rs800 billion for FY23 as against Rs570 billion budgeted for FY22.
In order to achieve this revenue target, government has estimated that new taxation measures will yield Rs355 billion whereas the remaining amount will be generated through growth in Nominal GDP.
National PSDP allocation set at Rs2.14 trillion is flat as compared to last year. This will be neutral for cement as well as construction sector.
Sales tax abolished on local coal, keeping in view higher commodity prices it is a relief for the cement sector. The sales tax on local coal is abolished. Previously, GST of Rs425/ton or 17% ad valorem tax, whichever is higher was applicable. Analysts believe this will have a positive impact on the cement sector.
The government has allocated Rs100 billion for the construction of Diamir Bhasha, Mohamand Dam, Dasu Dam, Nai-Gaj Dam and small dams in underdeveloped districts. This will have a positive impact on cement demand.
The condition of showing CNIC of unregistered persons have been removed which bodes well for the cement sales as the large part of the economy remains undocumented.
One percent tax is imposed on the fair value of property exceeding Rs25 million. In order to tax rich more 1% tax is levied on fair value of property exceeding worth Rs25 million (more than one property). Analysts expect this to be neutral to negative for the cement sector.
Analysts believe, the Government is expected to announce some increase in power tariff for FY23 soon. If power prices are not raised, it will result in aggravating of circular debt position in country.
Consumers using lesser than 200 units of electricity will be facilitated in obtaining soft loans from the banks for the purchase of solar panels. This will increase demand for solar panels.
Allocation of Rs570 billion for power including Rs180bn for IPPs Government has allocated Rs180bn for IPPs in FY23 budget. This will be cash flow positive for IPPs when payment is released to the IPPs.
Sales Tax exemption on import of plant and machinery Government has exempted sales tax on import of plant and machinery for power generation. This will be positive for HUBC’s ongoing projects ThalNova and Thal Energy.