With CGT cut, PSX gets major boost

Proposed incentives will lend much-needed support; index likely to touch 55,000 points by December

KARACHI:

Pakistan Stock Exchange (PSX) is expected to surge to an all-time high of 55,000 points by the end of December 2021 in the wake of acceptance of its longstanding demand for reducing capital gains tax (CGT) on sales of shares at the bourse.

The announcement of a pro-growth budget for the next fiscal year starting July 1, 2021, which includes incentives and reduction in tax rates for different sectors of the economy, would extend much-needed support to the bourse and take the benchmark KSE-100 index to new highs.

The PSX’s benchmark index touched a record high of 52,876.46 points four years ago on May 24, 2017.

“It is proposed to reduce the rate of capital gains tax to 12.5% (on sales of shares at the PSX) from the current 15% to ease the hardships faced by the stock market over the last two years in the wake of Covid-19 pandemic,” Finance Minister Shaukat Tarin said while presenting the budget for next fiscal year 2021-22 in the National Assembly on Friday.

The government has set the gross domestic product (GDP) growth target at 4.8% for fiscal year 2021-22 compared to the revised growth estimate of 4% for FY21.

Read: PSX to maintain growth trend

It announced total budget outlay of Rs8.48 trillion with revenue collection target set at Rs7.09 trillion.

“The proposed cut in CGT will bring fresh investment to the stock market,” said Pak-Kuwait Investment Company Head of Research Samiullah Tariq while talking to The Express Tribune.

Besides, the removal of withholding tax (WHT) on the withdrawal of cash from banks, tax incentives for 850cc cars and electric vehicles, agricultural package, tax concessions on new investment in petroleum refineries and removal of WHT on financing (margin financing) for share purchase, all would help the index to grow by 14% to 55,000 points by December 31, 2021, he added.

“The pro-growth budgetary measures will support the index to surge by 24% to 60,000 points over the next one year (by the end of June 2022 compared to Friday’s close),” he said.

The KSE-100 index closed at around four-year high of 48,531 points on Friday with a nominal gain of 53.23 points or 0.11%.

Tariq said the removal of 0.6% WHT on withdrawal of over Rs50,000 from banks in a day by non-filers of tax returns would help financial institutions to attract higher deposits from the people.​​​​​​

“People (non-tax filers) have opted to keep cash at homes instead of depositing in banks to avoid WHT payment on withdrawal. The removal of WHT is positive for banks and banking stocks should spark renewed buying at the bourse,” the analyst said.

Similarly, the reduction in taxes on import of parts, sales of 850cc cars and local production of electric vehicles is positive for automobile sector in the stock market.

The finance minister also proposed tax incentives for petroleum refineries and fast-moving consumer goods (FMCGs).

“Shares of companies related to such sectors should attract extended buying at the PSX,” he said.

In addition to this, the finance minister also proposed to allow companies listed at the PSX to adjust input tax up to 100% on their output, saying that the companies were already highly regulated.

“The proposed tax incentive is a big breakthrough in facilitating the corporate economy and regulated corporate sector,” Tarin said during his speech.

Read more: Bulls charge as PSX surges to four-year high

The industry has been demanding up to 100% adjustment in input tax against the available 90% limit under Section 8B of the Sales Tax Act. The law allows industries to adjust the remaining 10% input tax next year. The tax adjustment was split over two years ago to check fake and flying invoices.

Unveiling the Economic Survey 2020-21 on Thursday (June 10), the government anticipated that the KSE-100 index would rise in FY22.

The index recovered 40% (or 13,883 points) over the past 11 months and closed at 48,305 points on Friday compared to 34,422 points on the last trading day of previous fiscal year – June 30, 2020.

The increase in the KSE-100 index was driven by the government’s large stimulus package, central bank’s policy rate cut, strong growth in large-scale manufacturing sector, improvement in external accounts and reforms introduced by the Securities and Exchange Commission of Pakistan (SECP) and PSX in the wake of Covid-19.

The all-time high volumes of 2.21 billion shares recorded in May and increase in the number of new companies floating their shares at the PSX suggest that the appetite for investment in the share market is on the rise, according to the survey report.