Pakistan Stock Exchange wins big in budget

Analysts say market to witness rally immediately

KARACHI: The Pakistan Stock Exchange (PSX) is expected to see an upward rally as an immediate reaction to the pro-stock market budget 2018-19 presented on Friday, experts say.

“The market will witness a post-budget rally,” EFG Hermes Chief Executive Officer Muzammil Aslam said in a post-budget comment to The Express Tribune.

The market is expected to react positively to the budget proposal of a cut in corporate tax, withdrawal of tax on bonus shares and rationalisation of broker taxes, added Aslam.

“Measures announced by the ruling government seem positive for the stock market,” Topline Securities seconded in a commentary.

The pro-stock market budgetary measures include removal of tax on bonus shares, which was a long time demand of the market. At present, the tax is collected at the rate of 5% of market value. “Ever since the imposition of this tax in FY15, there has been a major decline in announcement of bonus shares by listed firms,” the brokerage house said.

The government has proposed to reduce the corporate tax rate to 25% (from current 30%) during the next five years. For FY19, the corporate tax rate would be reduced by 1% to 29%, which would result in marginal earnings growth. Super tax is also to be reduced by 1% every year (currently it is 3% for non-banking companies and 4% for banks) and would be phased out in the next three years for non-banking companies and four years for banks.

Besides, Real Estate Investment Trusts (REITs) have also been provided tax relief as dividends are now subject to tax of 7.5% as compared to the previous 12.5%.

Advance Withholding Tax (WHT) collected from stock brokers at 0.02% has been made adjustable. This WHT was previously a final tax liability, which led to higher taxes for brokers.

Moreover, minimum dividend payout has been proposed to be reduced to 20% from 40% and penalty has been proposed to be reduced to 5% of profits from previous 7.5%. Currently, a company (other than banks, independent power producers and state-owned entities) has to pay 40% of its profits as dividends. If it does not distribute dividend, the company is subject to 7.5% tax on its profits. Against strong market expectation, however, the government did not rationalise Capital Gains Tax (CGT) on sale of shares. CGT rate remained flat at 15% regardless of the holding period for filers and 20% for non-filers.

Also, tax on dividend income has been maintained at 15% for filers and 18% for non-filers. The minimum turnover tax has also been maintained at 1.25%. Further, tax on inter-corporate dividend has also been maintained.

“Brokers’ tax being made adjustable should improve volumes and liquidity in the market and reduce cost of investors,” JS Global Research Chief Commercial Officer Khurram Schehzad said. He said the removal of bonus tax should provide a boost to banks and other key sectors who frequently issue bonuses.

Mutual funds investors will also again opt for bonus shares issue due to tax arbitrage between bonus and dividends.

Moreover, incentives on the agriculture side like cut in general sales tax on fertiliser and tax incentive for refineries for expansion (20 years tax holiday), with some material support to improve exports sector, are good measures for both direct and indirect impact on the market, he said.

A short rally?

Insight Securities’ analyst Zeeshan Afzal said the partial pro-stock market budget should see a “slight positive rally and not an extreme positive or negative rally.”

“Worsening affairs of the domestic economy on the external front may not allow the rally to go on for very long,” he said.

Additionally, the government did not rationalise CGT, which was the single largest reason for a notable recovery in the last three-four months. He said banks may see a mixed rally as a reduced corporate tax rate would become applicable on them with effect from January 1, 2019 compared to other sectors where it would be effective from July 1, 2018.

Published in The Express Tribune, April 28^th, 2018.

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