A pleasant surprise for investors

By Dilawar Hussian

Stung by the federal budgets for the four preceding years, investors were overjoyed by the budget 2018-19, unveiled last Friday.

Most listened with disbelief as the day-old Finance Minister Miftah Ismail rolled out a long list of incentives and tax concessions for the capital markets. No one had really thought that the government would concede to some major demands such as the tapering off of the Corporate Income Tax Rate.

Effective upcoming financial year 2018-19, the tax rate on companies, which currently stands at 30 per cent, would be reduced by one per cent every year — 29pc for FY2019 and sliding down over the next five years to 25pc by FY2023.

The second surprise was the removal of tax at 5pc on bonus shares first levied in the FY15 Bill. The removal of the levy was a major demand of the Pakistan Stock Exchange (PSX) which the bourse has continued to pursue in all its budget proposals year after year.

Another major positive move was to extend the eligibility period for availing tax credit pertaining to investment in plant and machinery for expansions till June 30, 2021 which was earlier due to expire on June 30, 2019.

In regard to the super tax which is currently levied at 3pc for companies and 4pc for banks, the budget proposes it to be reduced by one per cent every year, to be phased out in the next 3-4 years. Many corporate watchers expected the super tax to be abolished, which was not to be.

“Reduction in corporate tax rate is positive for the market but the extension of super tax is a dampener”, says veteran value-investing broker Amin Tai. He also believed that deep down the budget was a ‘non-event’ for several important sectors of the stock market.

Mr Tai lauded the exemption of tax on bonus issues, but said that turning a blind eye to the restoration of slab-wise regime of capital gains was a disappointment.

Arif Habib, former chairman of the Exchange reckoned that the budget was “Investor friendly”. He said that foreign investors who were given to ignoring Pakistan, insisting that the country did not have a competitive tax regime, would be encouraged to look hard at the current measures which could promote investment.

Mr Habib observed that the other objection of overseas investors regarding the high cost of gas and electricity remained to be addressed. The tax rate on dividends from Real Estate Investment Trust (REIT) has been reduced to 7.5pc, from 12.5pc.

Other optimists such as Khurram Schehzad, chief commercial officer JS Global counted several salutary measures. He said that tax incentives for individuals/salaried class would provide long term relief to such salaried individuals. He believed that bonus tax removal would provide a boost to banks and other key sectors who frequently issue bonuses.

“Mutual funds will also opt to resume issuing of bonus shares due to the tax arbitrage between bonus and dividends” Khurram said and added that the brokers’ tax made adjustable should improve volumes and liquidity in the market and reduce cost to investors.

Although Finance Minister Miftah Ismail had to read out the budgetary document in a hurry with the opposition breathing down his neck, to most the budget seemed to be well-balanced.

The major complaint of those who fret over the budget is that contrary to general expectations, capital gain tax regime on disposal of securities has been kept unchanged. More disappointments were the status quo on tax on cash dividends and income from mutual funds.

The payout requirement of 40pc of after tax profit for corporations has been slashed to 20pc and the applicable tax rate on accounting profit in case of failure to distribute such dividend has been reduced to 5pc from 7.5pc.

While corporate bosses are happy over the acceptance of the board of directors right to decide between retention and distribution, small shareholders who depend on cash dividends for their bread and butter were fuming.

Aslam Memon, who has already lost 20pc of his petty savings due to the rout of the stocks since May 2017, grumbled that in trying to please the powerful corporate sector and deep pocket investors, the budget had robbed them of their small earnings though dividends.

He also said that small investors with little means prefer cash dividends over bonus shares and disincentive of tax withdrawal on bonus issues would hit their cash payouts. Being a non-filer due to no regular income, Aslam also slammed the provision of prohibiting purchase of property having a declared value exceeding Rs4 million.

The government has also tried to pacify the stock broker fraternity by proposing to make withholding tax rate of 0.02pc on transactions of stock brokers adjustable instead of treating it as a final tax.

Making a case against FM’s rash remarks on NFC

By Jawaid Bokhari

The federal fiscal transfers under the extended 7th NFC award which completed its five-year mandated term in mid-2015 are estimated at Rs2,590 billion for FY2019, up from Rs2,384bn budgeted in the previous fiscal year.

This increase in provincial revenues will help shore up socio-economic uplift programmes at a time when federal development spending has been slashed and current expenditure hiked. Defence and debt services account for 65 per cent of the estimated federal current expenditure.

While the Federal Finance Minister Miftah Ismail laments that federal revenues have shrunk by 10-11pc as a result of 7th NFC award, he tends to forget that most of the development functions have been devolved to the federating units after the 18th Amendment.

The provincial development spending is a critical factor in supporting the current growth trajectory which the PML-Nawaz government claims as its exclusive achievement.

Much of the credit for this year’s 3.81pc growth, highest in 13 years, in the agricultural sector goes to the sub-federations as agriculture is a provincial subject.

The combined provincial Annual Development Plans (ADPs) exceeding the federally financed Public Sector Development Programme has helped propel the expansion of the economy. To quote the latest economic survey: in the first half of FY 2017-18, the actual development spending by the provinces at Rs316.8bn was much more than that of the federal government recorded at Rs242.1bn.

Development of human resource, a primary responsibility of the federating units, is also an important factor in raising productivity.

No doubt the centre’s investment in physical infrastructure and energy has helped boost economic growth but this has been complimented by a surge in provincial expenditure on health, education and skills development after the 18th amendment and 7th NFC award.

The socio-economic uplift programmes undertaken by the provinces are part of the agenda for sustainable development.

Then the provinces also help the federation to contain fiscal deficits. When federal fund transfers, accounting for 80pc of the total provincial revenues increase, the sub-federations produce bigger budget surpluses that assist Islamabad to reduce fiscal deficit.

During July-December FY2018, the cumulative budget surplus shot up to Rs203.9bn from Rs90.6bn a year ago because in the comparative six months federal transfers went up simultaneously to Rs1,363.9bn from Rs1,064.2bn. For the FY2018-19, these surpluses have been estimated at Rs285.4bn.

While further fiscal devolution has been arrested at the technical level — owing to deadlock in the National Finance Commission over the 9th award — proactive federalism by minority provinces has extracted the PML-N government’s promise to include some of the projects recommended by the provinces in the federal Public Sector Development Programme, not considered by the National Economic Council (NEC) in its April 25 meeting.

A few federal projects are reported to have been dropped to accommodate provincial projects to keep the overall size of the PSDP intact.

While the federal Finance Minister Miftah Ismail laments that federal revenues have shrunk by 10-11pc as a result of the 7th NFC award, he tends to forget that most of the development functions devolved to the federating units after the 18th Amendment

Perhaps Punjab Chief Minister Shahbaz Sharif left the NEC meeting earlier anticipating what was going to happen and to avoid an embarrassing situation as the PML-N president.

It may be recalled that it was Shahbaz who made the 7th NFC formula possible by conceding to do away with the sole criterion for distribution of resources on population basis. Punjab also accepted that ‘every subsequent award cannot be less than the previous one’.

Given this background, the chief minister of the largest province may have a different view than that expressed by Finance Minster Miftah Ismail who presented the federal budget.

Mr Ismail wants to scale up federal share in the Federal Divisible Pool following previous finance minister Ishaq Dar’s footsteps. Mr Dar’s surprising interpretation of the ‘net’ proceeds of the Dividable Pool was intended to scale up the federal share of distributable resources by 7pc on various counts.

The proposal had turned out to be one of stumbling blocks in finalisation of the 8th NFC award. Though rejected by the provinces, the proposal is still not yet off the NFC agenda for the ninth award.

Miftah Ismail had told senior journalists last October that the 7th NFC award had tilted resources away from the federal government towards the provinces and it needed a revisit.

However, self -assertion of the minority provinces has received an impetus from the weakening of the PML-N government’s writ under immense political pressure at the fag end of its tenure.

Officials of the Sindh government hold the view that the horizontal distribution criteria are at the ‘minimum level’ and need to be expanded to include infrastructure. They agree that implicit in the proposal is that the distribution of resources on the basis of population should be reduced.

It is stated that there is an overwhelming, disproportionate gap between Sindh’s contribution in the country’s overall tax revenue and the share it receives from the federal Divisible Pool. Punjab is the fastest developing province and more prosperous than any of the minority provinces and perhaps it can afford to reduce its share linked to population ratio.

The finance minster should consider the views of the provinces on how revenues can be raised by devolution of collection and distribution of taxes on the basis of equity and efficiency. As he revealed, The Federal Board of Revenue’s (FBR) revenues will go up by 11pc in the next year which will be less than the nominal GDP growth.

The four provinces and the federation recognised each others’ rights and responsibilities when they signed the First National Water Policy on April 24 to mitigate the impact of climate change and for rapidly developing water resources.

The mutual accommodation demonstrated by them at the Council of Common Interests meetings should be emulated for forging the 9th NFC award.

Significant steps stir strong sentiments

Muhammad Ali Tabba, CEO of Lucky Cement

For me, this is a balanced budget. Realtors are not happy because the sector is almost undocumented and undervalued. In future, the property value has to be declared very close to the market value. For the textile sector, I believe the government will announce an export package soon.

Ahmed Kuli Khan Khattak, CEO of Ghandhara Nissan

The whole process of this budget is illegal. No previous government has done this. It is a last-ditch effort of the present government to make the maximum of a lost cause.

Shabbar Zaidi, Senior partner and chairman of A.F. Ferguson & Co

I think this is a significant budget as far as the correction of the tax regime is concerned. Some major steps have been taken for bringing in the untaxed into the tax net. A major amendment has been made with respect to the property acquisition. Moreover, the wrong system of property evaluation has been abolished.

The second important step is the evolution of the presumptive tax on importers. Presumptive tax is basically a red law. It promotes fund augmentation.

Thirdly, the incidence of tax on the corporate sector by opponent shares and the saturation of the reserves has gradually been abolished, and it’s a step in the right direction. The rates of the companies are going to be reduced in a­­­­ phased manner which is a great idea.

Another positive step is that the budget target has only been increased by 11 per cent which is quite reasonable compared to the last year. It’s a reasonable, achievable target

Syed Nabeel Hashmi, Auto parts exporter and former chairman of Papaam

In my opinion, the budget for 2018-19 is negative for the automotive sector. The reduction in duty and exemption from regulatory duty on electric cars will put pressure on local car assemblers. The government should have announced special tariffs for completely knocked down kits (CKDs) of electric vehicles to encourage their local production. The import duty on completely built-up units (CBU) should have remained at the existing level.

The decision to allow import of vintage and classic cars on a flat duty is liable to be misused.

The measures restricting non-filers from purchasing new locally assembled vehicles will push them towards used cars, thus incentivising imports over the domestic industry. This decision is not understandable when the auto sector has contributed significantly towards the overall growth this year.

The tax cuts for individuals and businesses are a positive step. Probably, the government had no option in the election year but to give a budget that is supportive of the industry. In the last five budgets, the government has done nothing but hurt the manufacturing sector and honest taxpayers.

Kaiser Waheed, Former chairman of Pakistan Pharmaceutical Manufacturers

At its core, this is a populist budget and that is what has been said in the media as well. It is an election-year budget. Concrete steps have not been taken and the gap between expenditures and revenue has been widened.

The pharmaceutical industry totally rejects this budget. It saddens us that the businessman who presented the budget and who knows how important the premise of national health is for the country did not, as per my knowledge, give importance to any of the pharmaceutical industry’s suggestions.

The revenue minister quite vehemently stressed the importance of our proposals regarding machinery, equipment and BMR. However, Finance Minister Miftah Ismail, who illegally presented the budget, opposed all our amendments.

On behalf of the Pakistan Pharmaceuticals Manufacturers’ Association (PPMA), we condemn his refusal to consider any of our suggestions. The pharmaceutical industry was envisaging that in this budget, if our recommendations were accepted, pharmaceutical exports could touch $1 billion in the upcoming two to three years.

Gohar Ejaz, Senior Aptma group leader

It is a disappointing budget for the textile industry. The government has neither announced any policy measures on energy pricing nor has it continued the export package.

How is the government planning to meet the current account deficit when it has discontinued the current policy, which resulted in a 10 per cent growth last year after four years of continuous fall?

Abdul Razak Diwan, Director of Gatron Industries Ltd

I believe that the budget impacts each sector in a different way, which is why I am giving a sectoral breakdown below:

Textiles (Positive)

The government has maintained the zero-rating status of the sector, whereas it has also proposed an improved mechanism to clear outstanding and new rebates.

Refund claims currently pending will be cleared in a phased manner over the next 12 months starting 1st July 2018.

After 1st July 2018 all new refund claims will be paid as per the time stipulated in law and regulations on monthly basis and there will be no delay.

The Long-Term Financing Facility (LTTF) and Export Refinance Facility (EFS) at lower rates will too continue; however, there was no mention of Export Finance Scheme (EFS).

The finance minister also mentioned that the government is set to announce another export-related policy, which we believe will bode well for the textile sector.

Tyres (Positive for General Tyre and Rubber Company, Service Industries)

Chemicals (Positive for Lotte Chemical Pakistan)

The withdrawal of customs duty on two catalysts, ie hydrogen bromide (11pc) and palladium on carbon (3pc), for use by the PTA industry is a positive step.

Gas distribution (Positive)

To address cash flow issues of gas distribution companies, it is proposed that the rate of sales tax may be reduced from 17pc to 12pc on import of LNG and supply of RLNG.

Banks (Neutral)

Withholding tax on banking transactions for non-filers will be reduced to 0.4pc from 0.6pc, which could potentially increase overall banking transactions.

Autos (Negative)

Non-filers shall not be permitted to purchase new motor vehicles manufactured in Pakistan or new imported vehicles.

Steel (Negative)

Increase in sales tax on electricity to Rs13 per unit from Rs10.5 per unit will have negative impact.