PSx organised a pre-budget briefing for media last month on its budget proposals. Banks see the increase in withholding tax for non-filers in budget 2016-17 stunting the generation of new deposits.
PSx organised a pre-budget briefing for media last month on its budget proposals. Banks see the increase in withholding tax for non-filers in budget 2016-17 stunting the generation of new deposits.

FROM a vantage point, the budget 2016-17 was widely regarded by market participants as ‘neutral’.

The budgetary measures for the fertiliser, textile and pharmaceutical sectors were generally assessed to be ‘positive’; for the oil and gas exploration and production companies, oil marketing companies, refineries, power companies, chemical companies, telecoms, automobiles, and gas distribution companies, the budget was also largely marked as ‘neutral’.

For commercial banks it was thought to be ‘neutral to negative’ while for the fast moving consumer goods (FMCG) companies; steel sector and insurance firms the budget was considered outright ‘negative’.

Views varied on the budgetary impact on the cement sector ranging from positive-to-neutral-to-negative. The following conclusions have been drawn from a study of post-budget reports prepared by various brokerage houses including InvestCap; Global; BMA Capital; Intermarket; Foundation; Topline and Standard Capital.

Textiles: The textiles sector has emerged as a major beneficiary of the budget mainly due to the grant of the zero-rated status to the export oriented sector; a change from the previous 5pc, along with the reduction of the Export Refinance Rate (ERR) to 3pc from 3.5pc.

While the grant of the zero-rated status was expected to resolve the issue of tax refunds held with the government, the cut in the ERR is likely to lead to lower financial charges, resulting in a positive impact of 1 to 2pc on major textile firms. These firms include Nishat Mills and Nishat Chunian — the two biggest in the sector. The sector’s powerful lobby, the All Pakistan Textile Manufactures’ Association, acknowledged the incentives provided to the industry in post-budget newspaper advertisements.


Insurance companies have been saddled with the imposition of a uniform tax rate of 31pc on all sources of income. The incentive of a variable tax rate from different sources has been withdrawn


Commercial Banks: An extension of the super tax at 4pc for one more year was calculated to hurt bottom-line of all banks by six to 7pc. This was in addition to the recent paradigm shift wherein the State Bank of Pakistan’s policy rate was cut by 25bps to 5.7pc. Banks also viewed the increase in withholding tax for non-filers as resulting in stunting the generation of new deposits. The government’s recent guarantee of up to 50pc of agricultural credit would provide comfort and encourage lending in banks.

Fertiliser: The government announced a Rs36bn subsidy for urea; Rs10bn subsidy for DAP and a reduction of GST on urea to 5pc from 17pc. The cut in subsidies is meant to revive the agricultural sector by lowering the urea price to Rs1400/bag from Rs1,780/bag, and that of DAP to Rs2,500/bag from Rs2,800/bag. Optimists said that the price reduction should improve the sector’s urea sales in 2016 and help clear out large urea inventories, which were thought to be 1.2m tonnes at end April 2016.

Cement: The big positive for the cement sector was the increase in the public sector development programme allocation by 21pc to Rs1.7trn. An extension of tax credit on BMR at 10pc unto June 2019 was positive for companies considering expansion, such as Cherat; Attock; DGKC and Lucky. On the flip side, the change of Federal Excise Duty (FED) to Rs50/bag replacing 5pc, would make each bag of cement dearer. If unable to pass on to consumers, cement companies were likely to see earnings attrition of around 9pc to 18pc.

Pharmaceuticals: The budget has reduced customs duty on various key raw materials used in the production of medicines such as anti allergens to 3pc from 5pc. This could expand gross margins for companies such as Abbott; Glaxo, Searle and Hinoon. Moreover, a limit on advertising expenditure for pharmaceutical firms has been set at 5pc of turnover; although since companies currently confine their advertising budgets to 3.5pc of turnover, no cut back on promotions is likely to emerge.

FMCG: The budget has proposed to abolish packaged milk from the zero-rated scheme, and impose an additional regulatory duty of 25pc on the import of powdered milk and whey-powdered milk. As powdered and whey-powdered milk are raw materials for Engro Food’s skimmed milk, the company’s cost of production may rise. Nestle also markets packaged milk. The FED on aerated beverages has been cut to 6pc from 12pc which would eliminate differentiations between aerated beverages and its substitutes such as fruit juices.

Automobiles: Measures have been taken to ensure that the auto policy, which will be applicable starting FY17 for a period of five years, is implemented swiftly. Banks and leasing companies would collect an advance tax at 3pc on the lease of cars from non-filers at the time of lease. The move was likely to affect potential sales of automobiles negatively as over 30pc of cars are currently sold and purchased via leasing facilities.

Insurance: Insurance companies have been saddled with the imposition of a uniform tax rate of 31pc on all sources of income. The incentive of a variable tax rate from different sources has been withdrawn.

Adamjee Insurance was likely to be the biggest loser, with its underwriting income barely breaking even, major contribution to its bottom line comes from dividends and capital gains from its investment portfolio, currently taxed at 12.5pc (7.5pc for power companies). Similarly EFU General is also likely to see an adverse impact on its bottom-line.

Published in Dawn, Business & Finance weekly, June 13th, 2016

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