Equity investors are unlikely to celebrate the much-awaited arrival of the budget when the market opens for trading today.

Their worst fears materialised as Finance Minister Ishaq Dar announced a hike in the capital gains tax (CGT) to 15pc from 12.5 pc on securities held for less than a year and to 12.5pc from 10pc on those held for over a year but less than two years. The government also introduced a new slab where CGT of 7.5pc will be charged on holdings for over two years but less than four years.

Former Karachi Stock Exchange chairman Arif Habib told Dawn that investors’ confidence could initially be shaken but they may be comforted by the fact that equities still give out the best returns among various investment avenues. He also believed that small investors may be encouraged by the reintroduction of the regulation that calls for compulsory payment of dividends by profitable companies.

The budget has proposed that a tax of 10pc would be charged on the excess reserves of a public company (excluding scheduled banks and Modarabas) that does not distribute cash dividends within six months of the end of the tax year or distributes dividends to such an extent where its reserves, after the distribution, exceed 100pc of its paid-up capital.

The hike in the capital gains tax and the withholding tax on dividends in the budget have dampened investors’ hopes

“We believe that this will either raise cash payouts from such companies or speed up their expansion plans,” commented JS Global analyst Syed Atif Zafar.

Raza Jafri, a director at Intermarket Securities, believed that the budget is more of a ‘mixed bag’ for the capital market and does not see investors getting spooked by the increase in the CGT.

“The new slab of 7.5pc CGT on holdings between 2-4 years will scarcely hurt individual investors as most of them do not hold equities for that long a period.” But he added that institutions may be sour over the extension in the period for levying of the CGT.

Some other optimists also brushed aside the increase in the CGT, saying that it has already been discounted by the market.

Mohammad Sohail, CEO of Topline Securities, said “while the hike in the CGT was already foreseen, the government should have announced a long-term policy on the tax to provide stability to the market”.

Another taxation measure that is unlikely to find favour with investors is the increase in the withholding tax rate on dividends by 2.5pc to 12.5pc. But a distinction has been made between tax return filers and non-filers. The tax on dividends for non-filers has been raised to 17.5pc from 15pc.

Meanwhile, a Fund manager pointed out that it was a relief to note that the existing rate of 10pc for mutual funds would remain unchanged.

And keeping up with its announcement in 2013, the government has proposed to reduce the corporate tax rate by 1pc to 32pc for FY16.

“Nonetheless, the market may be disappointed that the government has ignored the plea to tax listed companies at a lower rate than unlisted companies so as to attract more firms to the capital markets,” mused a major market player who also sits on the KSE’s board of directors.

In terms of specific areas, the heavyweight banking sector is likely to take a major blow as the government has proposed rationalising the tax rate applicable on their different revenue streams.

Presently, a 35pc tax is applicable on all banking incomes except those from dividends (which are taxed at various rates from 10-25pc) and from capital gains (which are taxed at 10pc and 12.5pc). Now, incomes from all sources are supposed to be taxed at a uniform 35pc.

On the other hand, a major beneficiary of the budgetary measures could be the cement sector, as the government has allocated Rs700bn for the public sector development programme (PSDP), up nearly 29pc over the previous year.

“The federal PSDP of Rs700bn and the cumulative provincial development budget of Rs814bn will take public sector development spending to Rs1.514trn, which is nearly 5pc of GDP,” noted analyst Atif Zafar.

However, Salim Kassim Patel, convenor of the budget subcommittee of the Association of Builders and Developers of Pakistan (Abad), criticised the government for being silent over proposals to reduce cement prices.

Under the Textile Policy 2014-19, a financial package of Rs64.15bn has been approved to double textile exports and create 3m additional jobs by 2019. While research analysts believe this to be positive news, the immediate reaction from the Federation of Pakistan Chamber of Commerce and Industry was that the budget proposals had failed to give incentives to export-oriented industries, particularly the textile sector.

The FPCCI, nonetheless, appreciated the incentives given to agriculture, construction and power sectors, and believed that those could help economic growth.

To encourage exports, the government had in the previous budget, through the State Bank of Pakistan, arranged a reduction in the mark-up rate on export finance from 9.4pc to 7.5pc. The budgetary documents state that the rate was reduced in February to 6pc, and it would be further brought down to 4.5pc from July 1.

It had also arranged a lowering of the mark-up rate on the long-term financing facility (for 3-10 years duration) from around 11.4pc to 9pc to allow export-oriented industries to make investments on a competitive basis. This was reduced to 7.5pc in February and would be further brought down to 6pc.

Meanwhile, a specific incentive was devised for ‘halal’ meat production. It has been proposed that companies that set up ‘halal’ meat production plants and obtain ‘halal’ certification by December 31, 2016, be allowed income tax exemption for four years from the date of the setting up of the facility.

Analysts said several corporates that have established subsidiaries to enter the ‘halal’ meat export business would be happy by this proposal. Some of them are already gearing up to take advantage of the demand for meat products, particularly from Middle Eastern markets.

Published in Dawn, Economic & Business, June 8th, 2015

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