THE STOCK market is always known to play on rumours. When the KSE opened the day after the budget, somebody passed around the word that withholding tax deduction on dividend paid to individuals would not be ‘presumptive’.

That was understood to mean that individual investors would henceforth pay the actual tax according to their respective income slabs at the time of assessment. It was a scary thought and as nervous investors began to sell, the index headed south and did not return until the dust settled on the issue the next day.

It transpired that the Income Tax Ordinance, 2001 which would replace Income Tax Ordinance, 1979 from July 1, has maintained status quo and withholding tax on dividends would continue to be treated as full and final discharge of tax liability i.e as presumptive tax. But other than that slight earlier upheaval, the stock brokerage fraternity stood united in acclaiming the budget as ‘investor- friendly’ for the capital market.

Withdrawal of withholding tax on bonus shares has always stood at the top of the bourse’s demands, for it is said to help capital formation. The Government conceded and also reduced withholding tax on interest from securities from 30 to 20 per cent.

Brokers have also been permitted more liquidity by cutting to a half withholding tax on commission—from 10 to 5 per cent. One of the major beneficiary of the Federal Budget 2002-03 looks to be the commercial banks. Their tax rate has been cut by 3 per cent to 47 per cent.

The rate was a huge 58 per cent two years ago, and the Government aims to progressively bring it down to the corporate tax rate of 35 per cent over a five year period. “Earnings of all commercial banks would improve as a results of this measure, but the impact in terms of cash flow will only appear after time lag due to the advance tax phenomenon”, say analysts at IP Securities.

Also an amendment in law stipulates extension of the period of carrying forward tax losses from six to ten years. Analysts believe this to be an attempt to facilitate the privatisation of nationalised banks. The government is also attempting to promote consolidation in the financial sector, which is why the budget proposes several incentives for mergers and amalgamations.

Budget also has incentives for the mutual funds—an underdeveloped industry in Pakistan, but a primary vehicle in developed economies — for channelling small investors’ funds into equity and corporate debt markets. Last year, the government had applied 10 per cent withholding tax on income from National Savings Schemes (NSS) instruments, if holdings exceeded Rs 300,000. This has been lowered to Rs 150,000 (applicable from July 1, 2002).

“This is positive for banking sector, corporate debt and equity markets as they compete with NSS for retained funds”, say analysts at brokerage, KASB & Co. To encourage the use of coal as a source of energy, import duties for cement manufacturers, on import of equipment necessary to use coal as fuel has been reduced.

The industry has been fast switching from furnace oil to coal and some are likely to attain 100 per cent conversion by end-December. The step would, nonetheless, encourage smaller units to take heart and join others in conversion.

When all else is good, it is often possible to ignore an occasional annoyance. So, while the corporate tax rate for unlisted companies has been cut by 2 per cent to 43 per cent, those for publicly traded companies, has been kept unchanged at 35 per cent.

The clear message looks to be to the hundreds of lame duck companies— especially in the textile sector— to opt for delisting from the stock exchange.

With the principal incentive of lower tax removed, it would be possible for the stock exchange to shed the useless excess baggage, but wouldn’t that also dissuade strong private corporates from seeking listing? “Federal budget outlines that the tax rate for all corporations—including commercial banks shall be homogeneous at 35 per cent by the year 2007”, says analysts.

The local PSF producers are drawing up long faces: They used to enjoy approximate 10 per cent import protection, which has come down to 5 per cent. How? Import duty on PSF has been reduced by 5 per cent to 20 per cent.

The 5 per cent regulatory duty has been abolished while the 20 per cent custom duty has been retained. It means negative hit of Rs 1.5 per kg for production. “For the local PSF industry which sells more than 400,000 tons of PSF it would work out to a drop of Rs 600 million in collective pretax profit”, says Mohammad Sohail, head of research at brokerage InvestCap, adding that the benefit would go to the textile sector.

Budget has brought ghee and cooking oil in the sale tax net, enhancing duty on imported oilseeds from 5 to 10 per cent and has imposed 20 per cent sales tax on edible oils (used in the manufacturing of ghee and cooking oil).

As was expected, the ghee and oil manufactures are passing on the GST impact to consumers and the grocers have raised retail price of ghee by Rs 10 per kg. Analysts at InvestCap sums up the budget as “a mixture of some positive measures and some proposals not quite in line with investors’ expectations”. InvestCap identifies banking sector, Oil Marketing Companies and Consumer goods manufacturers like Levers to benefit from the budget.

Synthetics & Fertiliser stocks to feel the heat in post-budget trading, while other sectors such as Telecom, gas, power, cement, insurance and auto, to remain unmoved.

IP Securities sums up that the budget ‘03 brings glad tidings for telecom, banking, Oil Marketing Companies, cement and the textiles, while it would be neutral for gas and fertiliser sectors. And finally, the Federal Minister has promised the promulgation of ‘Takeover law’. Everyone is taking this with a pinch of salt.

The matter is suspected to be mired deep in inter-ministry wranglings, which is why no one expects it to see the light of day anytime soon. Said one analyst sarcastically, “We’ll believe it, when we see it”!