INVESTORS in equities who had scrambled to buy shares on Friday hoping to hear some extraordinary investment promotion measures for the stock market that evening, were expressing mixed reaction on what finally came to be unveiled in the federal budget 2012-13.

Many who envisaged a great rally in stock trading for Monday - the first day following the announcement of the budget - were pulling up long faces. But for all that, some of the sector specific measures were received with warm response. Investors in cement stocks believed they could make concrete profit, but fertiliser shareholders looked glum as they were left holding dirty end of the stick.

However the greatest relief to the entire market, which no one did deny, was offered in the form of incorporation of the Capital Gains Tax (CGT) Ordinance in the budget 2012-13. It contained the ‘no questions to be asked on source of funds invested in equities for two years’.

Veteran broker and a former chairman of the Karachi Stock Exchange Arif Habib acknowledged it to be the big positive for the stock market.

He hoped that the much-awaited step would bring relief to nervous investors, sitting on the sidelines. “It is likely to give fillip to the market and improve turnover,” he said.

Some of the market players were sore that most of the budget proposals presented by the KSE were ignored. “The market was looking forward to reduction of corporate tax rate for listed companies to 30 per cent which would have helped attract more companies for listing,” said a market participant.

Stock broker Haji Ghani Haji Usman said he would have been happier if the proposal of making it mandatory for listed companies to pay 40 per cent of their profit in cash dividend to shareholders was accepted.

Analysts at stock brokerage houses, banks and financial institutions burnt the midnight oil in order to fish out the positives and negatives in the budget for the capital markets. “As expected, the budget remained muted for stock market in terms of any new developments,” said a market strategist.

“However, it seems to bring happy tidings to some of the sectors. Some of the measures evident were: To promote investment in Initial Public Offerings (IPOs) and life insurance, the allowed tax credit is proposed to be increased to 20 per cent or Rs1.0mn from 15 per cent and Rs0.5mn; whichever is lower. The minimum lock in investment period has been proposed to be reduced to two years from three years.

To promote investment in capital markets through asset management companies, the FED on services of these companies is proposed to be abolished. Analysts said the proposed hike in taxes on banks on dividends from money market funds and income funds would attract fresh inflows to equity markets as tax on dividend income from equity funds has been retained at 10 per cent.

Sector-wise, the reduction in FED on local cement sales by Rs100 per ton against expectation of Rs200 per ton was a slight dampener.

However it will still be a positive trigger as the relaxation in FED by Rs5 is expected to be gradually absorbed in the retention level. It was complimented by the decision to reduce the custom duty on shredded rubber scrap to 10 per cent (previous rate: 20 per cent) which would have a nominal impact on margins as coal would continue to remain the dominant source of fuel.

“While corporate tax rate has been maintained at 35 per cent, proposal of increase in tax rate on investments in treasury bills has also not materialised – this is to be taken as a sigh of relief for the sector and should result in respite in stock prices following the underperformance off-late,” stated BMA Research.

Tax rate on dividends received from investment in money market and income funds will be increased in two phases. The tax rate will be increased to 25 per cent in FY13 and 35 per cent in FY14. This will evade the tax arbitrage opportunity for banks and bodes negative for banks.

However, analysts believe that banks would opt for bonus option (instead of cash dividends) thus avoiding proposed measure.

Tax credit on investment in life insurance schemes has been raised to 20 per cent or Rs1.0mn; whichever is lower (from 15 per cent or Rs0.5mn previously). The credit is applicable if units are held for two years (from three years previously).

The measure will make purchase of life insurance units more attractive. It bodes well for the life insurance sector that FED on livestock insurance has been abolished and gas cess on fertiliser has been enhanced by Rs103 per mmbtu.

The decrease in turnover tax from one per cent to 0.5 per cent will bode well for the loss-making entities and small companies in the sector.

To discourage the Presumptive Tax Regime (PTR), the tax rate on imports has been curtailed to three per cent (previous rate: five per cent).

The decrease in the cost of imported raw materials and other items will provide further relief to manufacturers.

Further, the decision to reduce tax rate on exporters from one per cent to 0.5 per cent will provide additional impetus.

A 3.5 per cent cut in GST will have positive implications on the telecom sector, particularly the PTCL and cellular companies, which was under the tax net of 19.5 per cent prior to budget FY13. This downward revision will result in lower calling rates and subsequently higher traffic for the industry.

Customs Duty on import of raw material for 88 drugs has been slashed. This will reduce manufacturing costs of medicines and thus may boost profitability of the pharmaceutical sector, in case the impact is not passed on.

Sales Tax on tea has been cut from 16 per cent to five per cent to discourage smuggled tea. The FED on skin care products has been abolished.

The measures are positive for the fast-moving consumer goods (FMCG)company.