Stock investors and company directors, found usually in closed-door meetings, were seen stepping out last Friday to fret, worry and stew over the budgetary measures announced by the finance minister that evening. It wasn’t quite what had been expected.

Investors had been buying stocks for weeks in the hope of a flood of foreign portfolio investment making its way into the market after June 1 — the effective date of inclusion of Pakistan in the MSCI Emerging Market category.

But for many, any hope from the budget was dashed to dust. Widely regarded as ‘negative’ for the capital market, some optimists tried to keep their sangfroid. The former chairman PSX, Arif Habib, said the budget proposals for the capital markets were not entirely negative or positive — but a mixture of both.

“The government has provided certain incentives such as a 1pc reduction in corporate tax rate to 30pc, but some other measures have indeed diluted the salutary impact”, he agreed.

Head of a major listed company frowned: “It’s akin to giving with one hand and taking back with the other”, he said. The corporate boss seemed particularly disturbed by the government’s decision to favour dividend payout over retention.

Currently corporations are required to pay dividends to shareholders as any accumulated reserves in excess of 100pc paid-up capital are taxed at 10pc. The caveat being that an exemption has been provided if the lower of at least 40pc after tax profit or 50pc of paid-up capital is distributed as dividend.

According to budget modifications, companies would be bound to pay out of at least 40pc after tax profit in cash dividend or bonus shares or else face a tax levy of 10pc in case of non-compliance, regardless of its paid-up capital.

While the budget was widely regarded as ‘negative’ for the capital market, some optimists tried to keep their sangfroid

“Seen as a victory for minority shareholders, corporation in the throes of expansion, which require retained earnings, are not likely to take it lying down”, the corporate chief asserted.

Analysts at First Capital Equities opined: “With an option of the dividend requirement being met through bonus shares, we might potentially see an influx of right issues, leading to higher liquidity. On the downside, sponsors may potentially decide to buy-back shares”.

But there was also a general dislike for budgetary measures on major concerns of the capital market. These included Capital Gains Tax (CGT), withholding tax (WHT) on dividends, tax on bonus shares, incentive of reduced tax for new companies coming up for listings.

CGT is currently charged as per a three-tier structure ranging from 7.5pc-15pc.

The budget proposes a single levy at a flat rate of 15pc for filers and 20pc for non-filers. Investors had hoped for tax on holdings for under a year to discourage speculation and waiver on securities held for more than a year to promote investment.

In its budget proposals 2017-18, the PSX had asked for a 20pc tax credit for five years to new companies that seek listings. The budget has extended tax credit for enlistment for initial two years at 20pc and at 10pc for the subsequent two years.

Disregarding the corporation’s cry of double taxation and therefore its waiver, the WHT on dividend has been raised to 15pc from 12.5pc and for mutual funds to 12.5pc from 10pc.

Investors who were building positions in the main textile stocks on pre-budget expectations of additional incentives to the export oriented sector so that it may improve overall exports and contain the escalating Current Account Deficit, were sorely disappointed.

Other negatives include: minimum turnover tax enhanced from 1pc to 1.25pc and continuation of Super tax at the rate of 4pc for banks and 3pc for other corporations for another year.

By contrast, the Federal Public Sector Development Programme (PSDP) has been earmarked at a substantially higher Rs1,001bn, something to cheer about by the cement and steel companies.

Zubair Ghulam Hussain, CEO at Insight Securities says: “Overall we believe the measures introduced in the federal budget are negative for corporate profitability as although the corporate tax rate has been decreased and enlistment benefits have been enhanced, extension of super tax and higher minimum turnover tax are likely to impact profitability adversely.

“From the stock market’s perspective, higher effective CGT might drive away long-term investors while higher tax on dividends would decrease the attractiveness of high dividend yielding companies.”

Most investors and brokerages varied in their views about the impact on different sectors on the PSX, such as textiles, insurance, automobile, fertilisers, banks, fast moving consumer goods, oil and gas, oil marketing companies, IT, Cement and steel sectors.

The budget was thought to be negative, positive, neutral-to-negative; neutral-to positive and simply neutral for each sector.

But overall, most stock strategists concurred that the budget 2017-18 could be construed to have neutral to negative undertones for the market.

Published in Dawn, The Business and Finance Weekly, May 29th, 2017