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.

Published in Dawn, The Business and Finance Weekly, April 30th, 2018