IT looks like the efforts of some big brokers to befriend the government have finally paid off as the finance minister proposed a number of incentives for the capital market in the mini-budget or, as it’s formally known, the Economic Reforms Package (ERP).

Brokers claim that the abolition of advance tax of 0.02 per cent on brokers after Jan 31 will reduce the cost of doing business for the fraternity and enhance volumes.

Another major demand of the market that has been conceded is the capital losses for trading in shares to be carried forward for three years. Currently losses for just one year are allowed to be carried forward. Traders believe this will help investors save taxes when the market provides positive returns.

It remains to be seen whether the IMF will see eye to eye with the government on the ERP, but investors are unsure

A salutary measure is the removal of the super tax from all non-banking sectors from July 1, something traders hope will improve corporate earnings.

Tax on undistributed profit levied at 5pc on corporations in instances where 20pc of earning have not been distributed as dividends has been abolished from FY2020. By this step, company boards have again been empowered to decide upon profit retention or distribution which, though good news for directors, could leave investors fuming.

Richard Morin, CEO of the Pakistan Stock Exchange (PSX) expressed satisfaction over the measures announced by the finance minister, terming them helpful in developing a vibrant stock market which will attract new investors and encourage a larger number of companies to float Initial Public Offerings.

He stressed that the PSX was attractively priced at around 7.5 times price-to-earnings multiple and with a dividend yield of 6pc. “Where in the world do you get such mouth-watering returns?” he queried.

Arif Habib, a former chairman of the bourse also visualised the budget as one that would create confidence in the minds of investors, industrialists and traders since most of the demands put up by the PSX, the Pakistan Business Council, the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) had been met.

Of the six major proposals that were forwarded by the PSX, four were granted: abolition of advance tax on brokers, carry forward of capital tax loss, the concept of a holding company and curb on over-regulation.

The listing of government bonds required resolution while the government had promised to consider one of the major demands of the PSX which related to rationalisation of capital gains tax in the next annual budget.

“The government has a good ‘pitch’ as it managed financial packages from friendly countries and enjoys the support of “institutions”, which raises hopes that it will be able to put up a big score on the board,” Mr Habib said.

Most market participants reckon that the ERP is generally ‘positive’ for autos, IT and textile, ‘neutral’ for banks and fertiliser and a ‘non-event’ for E&Ps, power and OMCs.

Amin Tai, a veteran value investor at the PSX proclaimed the ERP as ‘growth oriented and a step in right direction’. He said that by abolition of advance tax of 0.02pc on brokers, a great wrong had been corrected.

Mr Amin believes that non-filers should not be kept out of economic activity as doing so would be harmful. “Let non-filers first enter the economy as it will make it easier to trace and pull them into the documented economy,” he suggested.

Other measures include relief from sales tax (for five years) for all upcoming Greenfield projects which will encourage investment by industrial undertakings.

Each time the finance minister has visited the FPCCI he has been met by strident demands, mainly from textile exporters, to help release the huge sales tax refunds. The minister has now proposed to clear it through promissory notes for exporters.

“A promissory note will resolve the liquidity problem of the sector as it could be accepted by banks as collateral. A profit rate of 10pc for a maturity of three years will be paid and the Note can also be traded in the secondary markets,” said an analyst.

“Though the announced reforms will be positive for the local stock market in the short-run, the lack of measures to address the burgeoning fiscal deficit (6-7pc of GDP expected in FY19) will likely limit any upside in the medium- to long-term, we believe,” wrote Topline Securities in its early note.

And for all that, it remains to be seen how the foregone revenue from various tax exemptions will be replaced and if the International Monetary Fund (IMF) will see eye to eye with the government on the ERP.

Investors are unsure about the IMF’s response, the first indications of which were provided by the trading session last Thursday when, after an initial euphoria that tossed the KSE-100 Index up by 551 points, the Index succumbed to profit-taking, reducing the day’s upside by 231 points at close.

Published in Dawn, The Business and Finance Weekly, January 28th, 2019