ON the record, most brokers and high net-worth individuals give a faint smile and term the budget 2014-15 as ‘pro-growth’ and ‘growth-oriented’. However, in private conversations, they have less polite words to utter.

Finance Minister Ishaq Dar proudly proclaimed the booming stock market as a jewel in the crown of the government’s ‘impressive’ economic performance. Yet, many investors feel that the capital market has been cheated of what was its due in the framing of the budget proposals. The stock market has reacted with dull trading and a decline of 88 index points in two sessions after the budget announcement.

The two main sticking points in the budget relate to the capital gains tax (CGT) and dividend on bonus shares. The original plan was to raise the CGT to 17.5pc from the current 10pc. But as the time for the budget announcement drew near, the market men started to grumble, terming 17.5pc as too high.

‘As the bonus issue is a cashless transaction, it will be difficult for a firm to pay cash tax out of cashless bonus issue,’ said analysts, while referring to the levy of 5pc tax on bonus stock

In subsequent meetings between the government and market representatives, there was an understanding that the burden would not be that heavy. The government kept its word, and instead of 17.5pc, the CGT was restricted to 12.5pc for securities held up to one year. So far, so good. Yet, CGT of 10pc has been levied for securities held between one and two years.

“The levy on holdings of up to two years comes as a rude shock,” says Arif Habib, a prominent broker-turned industrialist. Several other participants believe that none of the markets in the region follow such a practice of discouraging long-term investment.

Mohammad Sohail, CEO of Topline Securities, says “CGT is negative for genuine investors, as normally long-term investment means more than one year. However, it is good news for speculators and punters, as their liability would be reduced from 17.5pc”.

But FM Dar had yet another surprise in his bag for the capital markets. A tax of 5pc is to be imposed on the value of bonus shares, determined on the basis of day-end price on the first day of book closure. The proposal has come under fire not only from brokerage houses, but also from reputed accounting and auditing firms as they draw up their impressions on the budget document.

Analysts at Arif Habib Limited believe that the government may have to revisit the tax on bonus issues. They contend that a company issuing bonus shares was liable to pay tax at 5pc even in case of default by the shareholder. “As the bonus issue is a cashless transaction, it will be difficult for the company to pay cash tax out of cashless bonus issue,” the analysts argue.

They add that even if a company withholds, say, 5pc of the bonus shares and sells it in the market to generate cash to pay the tax, coming up with proceeds equal to 5pc of ex-price would be practically difficult due to a possible floor on the stock price because of excess supply. Other institutions and brokerages have equally convincing reasons to crack down on the budget proposal.

Stock brokerage firm InvestCap worries that the imposition of tax on issue of bonus shares would restrict investors’ interest in bonus issuing companies.

On the positive side, the corporate tax for non-banking companies has been reduced by 1pc to 33pc, from 34pc, keeping up with the government’s plan to ultimately bring down the rate to 30pc. “The government has kept its promise of reducing the corporate tax rate, and to a great extent, it would set-off negative impact of other measures,” says Arif Habib, a former KSE chairman.

Other analysts say the budget proposal of reducing the minimum tax on turnover for oil marketing companies (OMCs), refineries and gas distribution companies comes as a pleasant surprise, as it would enhance earnings of corporates in those sectors.

Analysts at Global Securities mentioned that a proposal to bring foreign institutions under the withholding tax regime was also under consideration. They believe that the budget was ‘neutral’ for banks, oil and gas, OMCs, power, cement, fertiliser and chemical sectors, while ‘positive’ for textiles and automobiles. Brokerages’ opinion on the impact on fast moving goods companies remained mixed.

Meanwhile, the government ignored the compulsory dividend payment proposal of the KSE, which even some major market players thought was a far-fetched idea. Muzammil Aslam, MD Emerging Markets Research, also pointed out that the government had not extended the amnesty of no declaration of source of funds to be invested in stocks. The amnesty, applicable from January 2011, is to end on June 30.

However, he believes that the higher allocation for public sector development projects by 24pc, as well as no new taxes in terms of sales tax and federal excise duty bodes well for several sectors on the stock market.

Published in Dawn, June 9th, 2014