Budget impact mixed for key sectors

Super tax relief offers lifeline to exporters, while higher fuel levies cloud OMC outlook

KARACHI:

The Federal Budget FY27 is expected to deliver a mixed but sector-specific impact across Pakistan's listed and industrial sectors, with fiscal adjustments influencing oil marketing companies, exporters, pharmaceuticals and consumer-facing industries in varying directions.

In a detailed post-budget commentary, JS Global senior economist Shagufta Irshad outlined that oil marketing companies (OMCs) may face mild pressure due to the government's decision to raise the petroleum development levy (PDL) target by around 14%. Achieving this target could require higher levies on petrol and diesel, potentially dampening fuel demand and affecting sales volumes.

The textile sector is expected to benefit from policy relief measures, particularly the removal of the 1% turnover tax and advance tax on exports, likely improving exporters' cash flows and easing working capital constraints.

In the pharmaceutical sector, the outlook is marginally positive, supported by the abolition of duties on select imported active pharmaceutical ingredients (APIs), including those used in contraceptive medicines and cancer treatments. The reduction in super tax is also expected to provide additional earnings support.

On the consumer side, tax relief for the salaried class is likely to improve disposable incomes, potentially strengthening demand for branded consumer goods and fast-moving consumer goods (FMCG). However, the imposition of a standard 18% GST on certain previously lower-taxed FMCG categories could create pressure in specific market segments.

Overall, the analyst viewed Budget FY27 as broadly neutral to mildly positive for export-oriented and select consumer sectors, while remaining cautious on fuel-linked industries amid higher levy requirements.

Relief from super tax

The government's decision to abolish super tax for large export-oriented companies has emerged as a key topic of discussion among economists and market analysts evaluating its implications for corporate profitability, investment activity and export growth.

Under the approved Finance Bill FY27, companies generating more than 80% of their turnover from exports will no longer be subject to super tax, providing significant relief to Pakistan's export sector. The move is expected to be positive for export-oriented companies including Interloop, Gul Ahmed Textile, Towellers Limited, Feroze1888 Mills, Artistic Denim, Masood Textile and Service Global Footwear, according to AKD Securities.

Analysts believe the move reflects the federal government's improved fiscal position following changes in the distribution of revenues between the federation and provinces.

Addressing the long-standing debate around super tax, AKD Securities Director Research Mohammed Awais Ashraf told The Express Tribune that "the levy was not an arbitrary burden on businesses but a reflection of the federal government's tight fiscal position, which left little room for revenue concessions in previous years."

The federal government previously faced severe fiscal constraints after transferring 64% of divisible pool revenues to the provinces, leaving limited resources to meet its own financial obligations.

"Earlier, after the distribution of funds to provinces, the residual amount available to the federal government was barely sufficient to cover interest payments," Ashraf noted.

The analyst explained that the government's decision to cap transfers to provinces at Rs13.5 trillion has created additional fiscal room, reducing pressure on the federal budget and enabling tax relief measures for key sectors.

"Previously, to create fiscal space of one rupee for expenditure or tax relief, the federal government had to generate nearly three rupees in additional taxes. With the cap on provincial transfers, that pressure has eased considerably," he said.

The development is expected to strengthen the financial position of major exporters, particularly in textiles, while potentially encouraging fresh investment and supporting export-led growth.