KARACHI, June 7: It must have required a big leap of faith to describe the federal budget 2003-04 as “investor friendly”, but that is how Moin M. Fudda, managing director of the Karachi Stock Exchange, insisted it was. Other analysts, however, agreed that accepting the demand of the bourse for exemption of capital gains tax — and that too for a year — economic managers seemed to have given little thought to the long list of budget proposals, presented by the “best performing stock market of the world”.

Firozuddin Cassim, chairman, board of directors of the KSE, said that he was reasonably happy at the moment that none of the incentives already available to industries had been diluted and no additional burden had been piled up. He said the Finance Bill would have to be studied to be able to understand the full impact, but on the face of it, the budget was both sweet and sour.

“It was disappointing that our proposal of exemption on dividend income and the maintenance of tax difference between private and listed companies have been turned down,” he said, but added that it was nice to see that the government had fulfilled its commitment of continuity of policies. One such example was the reduction of tax rate on banks by 3 per cent. Also, he said, all the major incentives given to housing sector, would propel 10 to 12 other allied industries, which could generate more jobs.

But several analysts just sat glum. Exemption of capital gains tax, which was available up to financial year 2004, had been announced extension by Prime Minister Zafarullah Jamali on an earlier occasion, but he was not quite clear whether or not it was to be a “perpetual” exemption, as was suggested by the Exchange. The Finance Bill makes it clear that the extension has been for a year only, up to 2005; the last time, exemption had been granted for three years.

That the tax on dividend income amounted to double taxation had been accepted by the US this year and President Bush had proposed to withdraw that tax in the US, but it did not quite register with the country’s finance managers and a silence prevailed over the bourse’s demand to remove the flat rate of 10 per cent on gross dividend income.

Another major demand of the capital market was the reduction of tax rates by 2 per cent on listed companies in line with the proposed reduction on private companies so as to retain the existing tax difference of 10 per cent between a private and public company. But the Government went ahead with its previous stance of cutting down tax rate on private companies by 2 per cent. “Since this will place private companies at par in tax treatment with listed companies from 2007 and onwards, it surely is a disincentive for new companies to opt for listing”, said an analyst. Nothing transpired also on the long standing demand of restoration of exemption on capital gain on sales of shares for insurance sector, which had been withdrawn from July 1, 1997. Stock brokers could also have reasons to pull up long faces for the finance bill said nothing about their plea to restore income tax exemption status of stock exchanges and tax exemption on conversion from individual to corporate membership of brokerage houses.

On the positive side, as the KSE MD pointed out, the finance minister proposed to allow initial depreciation on second-hand plant and machinery, which would encourage investment in industry. Also, losses sustained by a concern during the tax holiday period was not adjustable against income of the post exemption period. Now such businesses would also be allowed to carry forward the losses. Housing and construction industry has admittedly been offered major incentives. As expected excise duty on cement has been reduced by 25 per cent (industry was asking for a 50 per cent cut). “That would work our to a decrease in cement prices by Rs12.50 per bag,” said Mohammed Sohail, head of research at securities brokerage firm, InvestCap.

He offered a cautious opinion about the budgetary measures. The analyst conceded that not everything that had been asked was granted. But the removal of Central Excise Duty on paper and board, wires and cables and the reduction of CED on cement were all expected to have positive influence on the concerned industrial sectors.

Recognizing that there was shortfall of 5.38 million houses and the need for new houses was increasing by 570,000 units every year, analysts appreciated that per party limit of loan for housing had been raised from Rs5 to Rs7.5 million and the maximum limit of lending from HBFC had been increased to Rs50 million, from Rs20 million. In addition to a 15-per cent raise in pay, government employees would also be provided housing loans through HBFC against government guarantees. Also, concession on cost of housing finance was being granted to encourage the housing sector. The finance minister declared: “Such facility was also being extended to loan from any bank or non-bank financial institutions.” But a couple of analysts, feared that such a step may result in piling up of non-performing and bad loans, which banks had been painstakingly reducing over the last couple of years. Those who looked on the positive side, however, argued that there was a safety net in the form of amendment in foreclosure law that now allows banks to repossess property without recourse to courts.