KARACHI: The net impact of the 2023-24 budget is expected to range between neutral and negative for most listed companies, even though a few sectors like technology, real estate and pharmaceutical may find some cause for celebration.

Speaking to Dawn, Ismail Iqbal Securities Head of Equity Research Fahad Rauf said the budget contains few significant events for the stock market based on the information available so far.

“The IMF programme is the key here. Going by the speech of the finance minister, I don’t think there’s any major deviation from what the IMF wants us to do,” he said.

No tax on reserves

The stock market saw a lot of activity in the run-up to the budget because of a rumour that the government would impose an advance tax on companies’ reserves, which are retained profits from past years.

Speculations that companies would have to pay an adjustable tax of 5-7.5 per cent on their retained earnings fuelled a spree of board meetings by listed companies. Firms rushed to shield themselves from the likely advance tax by declaring one-time, heavy pay-outs to shareholders in the form of either cash dividends or bonus shares. A larger number of companies resorted to declaring bonus shares as the same aren’t currently taxed, unlike cash dividends that attract a 15pc tax.

However, Finance Minister Ishaq Dar refrained from announcing on Friday any tax on corporate reserves contrary to the market expectations. At the same time, he proposed a 10pc tax on bonus shares — a move that’s likely to put an immediate stop to the spree of bonus share declarations on the stock market.

“The proposal to tax retained earnings received a significant backlash from industries, which might’ve led the government to drop it,” said Mr Rauf.

A major blow to large-scale companies in this budget came in the form of a proposed increase in the number of super-tax slabs, with the highest rate of 10pc versus the existing rate of 4pc.

According to Topline Securities, all companies with income of more than Rs500 million will be required to pay a 10pc super tax in 2023-24. In other words, companies earning more than half a billion a year will pay 39pc in tax as opposed to the regular 29pc rate.

Mr Dar also announced, albeit with few details, an additional tax of up to 50pc on any “extraordinary gains” owing to exogenous factors in last five years. It aims to tax banks, energy companies, textile exporters and IT firms for taking advantage of fluctuations in the foreign exchange rate and commodity prices — a move that’ll hurt some of the index heavyweights.

Mr Dar didn’t propose any changes in the tax rates on capital gains, cash dividends and intercorporate dividends. However, he proposed re-imposing a 0.6pc advance tax on cash withdrawals by non-taxpayers. This move is expected to bode ill for the economy as it’ll push the cash in circulation further up.

The textile sector will likely be hurt as the sales tax rate is proposed to go up from 12pc to 15pc on leather and textile products sold at retail stores through point-of-sale machines.

The budget is also positive for the pharmaceutical sector because it includes another active pharmaceutical ingredient, which is the main component of a medicine, as well as three drugs in the existing duty-free import regime.

As for the IT sector, the budget proposes the continuation of a concessionary tax rate of 0.25pc for exports for the next three years.

Published in Dawn, June 10th, 2023