Pakistan Budget FY25 – Stock market measures; Positive for market

Contrary to expectations of change in treatment of income from capital gain and dividends to normal tax, affecting net returns of the investors; we believe the budget FY25 is overall positive for the market as Govt. has not changed treatment of CGT to normal tax.

Alongside this, the maximum rate of 15% tax on CGT has also remained unchanged (though removed slab benefits on holding for more than a year on purchase after Jul 01, 2024) for tax filers and tax on dividend has also remained unchanged at 15%.

To note, in anticipation of above measures, market lost 4% or 3,186 points in last 12 sessions.

We believe, this budget will serve as prior action for the new IMF program and based on the May 2024 publication of IMF, tax revenues, primary surplus, and current account deficit targets for the Government were, Rs12.97tn, Rs2.5tn (2.0% of GDP with provincial surplus of Rs1.2tn), and US$3.7bn (0.8% of GDP).

We believe, revenue measures, taken in this budget to achieve desired tax revenue and primary surplus targets, are quite realistic and this will pave the way for Pakistan to enter in new IMF program by getting Staff Level Agreement (SLA) done in start of Jul 2024, if approved.CCP Probes Poultry Firms Cartelization

Successful passing of this budget in compliance with IMF targets, will serve as a major catalyst to PE rerating. We had also previously highlighted this in our mid year strategy report dated May 11, 2024, titled Index to reach 87k by Dec 2024, 106k by Jun 2025 – PE to revert to its mean in 3 years, “that current PE of 3.7x will linearly revert to its historical average of 6.93x over next 3 years of IMF program (Jul 2024 – Jul 2027), subject to successful implementation of the program and its conditionalities with respect to fiscal/monetary discipline and structural reforms”.

Below mentioned is the analysis/comments on measures which were either expected by market or govt has announced it in actual;

CGT Tax: Government has removed slab wise benefit on Capital Gain Tax (CGT) for holding securities for more than a year on purchase after Jul 01, 2024.

However, the top slab rate is unchanged at 15% for tax filers, while non tax filers, rate has increased from 30% to 45%. We believe, this is positive for market as it was rumor in the market that, government is mulling to change the treatment of CGT from full and final tax to normal tax. While in actual, there is no change in treatment of CGT this will remain as full and final.

Dividend Tax: There is no change proposed in tax rates for dividends income for both filers and non filers. This is positive for market as there were some news reports suggesting tax on dividend income will go up. Also there were speculations about change in treatment of dividend income to normal income. Status quo on this is positive for market.

Bonus: There is no change in bonus tax. This will be neutral to positive for market.

Minimum Turnover Tax: Minimum turnover tax has remained unchanged contrary to general expectations of increase in this rate. This will be positive for low margin businesses like OMCs, chemicals and steels etc.

Change in tax regime for exporters: Government has changed full and final tax of 1% of turnover on export based industry to normal tax. Now exporter like textile, and rice etc. will normal corporate tax of 29% + applicable super tax.

The charge of 1% tax would be now minimum, in line with other industries. This will be negative for export oriented sectors like IT companies, textile and rice. We are unclear whether this will imposed on IT cos or not, we await to seek clarity on this.

Gradual removal of sales tax exemptions on FATA/PATA: Industries (Steel, Ghee etc) operating in FATA/PATA were exempt from taxes, however, government has removed sales tax exemption on industries in FATA/PATA in phased manner.

However, exemptions with respect to income and withholding tax is extended for one more year. This was long standing demand of steel, ghee players as products were dumped from FATA to other cities of Pakistan, especially in Punjab. This will be positive for steel, edible oil cos.

Taxation on Reserves/Retained Earnings: There is no news/measures with respect to tax on reserves. This is neutral for market.

Withdrawal of various exemptions/zero rating and reduced/fixed rate: The government has withdrawn various exemptions/zero rating and reduced/fixed rates on products. This was widely reported in media and government has implemented this measure. We believe, this will be neutral to negative for market.

Increase in FED on tobacco: Contrary to expectations, the government has made a favorable shift in tax slabs for locally manufactured cigarettes. Earlier Rs16,500 tax was applicable on per thousand cigarettes exceeding Rs9,000 printed retail price, however, this will be now applicable on printed retail price of 12,500.

While ciggerates with lower than printed price of 9,000 were subject to 5,050 FED, this will be now applicable on printed prices lower than Rs12,500. This will be positive for listed tobacco companies.

Uniform tax rate on mobile except for value exceeding US$500bn: Earlier cell phones in range of US$30-200 were subject to sales tax of Rs130-1680 (less than 3%), now these will be taxed at 18%.

We believe, prices of cell phones below US$200 (~Rs57,000) will be increased by up to Rs9,000. We believe, this will neutral for mobile manufacturers and distributors like Airlink as increase in GST is a pass through item. While tax rate on phones between US$200-500 will remain same.

Increase in GST on POS retailers from 15% to 18%: This was widely expected measure. This will be neutral for listed textile companies like GulAhmed (Ideas), and Sapphire as increase in GST will be passed on to consumers.

Increase in income tax on immovable properties: Increase in tax on immovable property will be positive for stock market as on relative terms tax rate is not increased on capital gain,” Topline Research said.

Outlook on Market: We believe, this budget will serve as a prior action for new IMF program. Subject to successful passage of this budget in compliance with IMF measures, market PE will rerate from current 3.4x to historic forward PE of 6.93x linearly in 3 years time. That said, we believe forward PE by Jun 2025 will rise to 4.6x, taking our index target for Jun 2025 to 106,000, providing return of 46%. In line with this, our Index target for Dec 2024 is 87,000, providing return of 20%.