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09 - 15 June , 2012

Budget: A populist one
Proposals are not likely to create new job opportunities or increase revenue collection due to prevailing energy crisis

While Federal Budget announced for financial year 2012-13 has attracted mixed reaction, one has to wait till it is approved by the parliament. Though, this time effort was made by some political parties to announce 'shadow' budgets, not much opposition is expected from the opposition parties. Since this is the election year it is anticipated PML-N will focus more on its strong hold Punjab to consolidate its vote bank, but PTI will remain the 'spoiler'. Any improvement in US-Pakistan relationship can help in building foreign exchange reserves and containing budget deficit. Finalising new terms of engagement with the United States and opening up of route for Nato supplies will not be easy because of the hostile public opinion.
The budget envisages an outlay of Rs 2,960 billion, anticipates a net inflow of Rs1,775 billion leaving a deficit of Rs1,185bn or 5% of GDP. The federal government expects provinces to produce a surplus of Rs80 billion which, if materialises, will bring down the deficit to 4.7% of the GDP, but that is not likely. Provincial budgets have to be watched keenly as 65% of the revenues are transferred to provinces and keeping in mind the upcoming election it would be difficult for provinces to achieve surpluses.
Allocation of development expenditure has been increased by 25% to Rs 873 billion out of which, Rs513 billion will be given out to provinces. While increase in absolute amount may be there two fears are 1) probability of slashing in case the government fails in containing budget deficit and 2) lack of capacity both at federal and provincial levels to initiate and complete some of the mega projects that could have a sustainable impact on people or help in generating revenue for the governments.
Despite improvements in tax collection during FY12 government has not been able to contain fiscal deficit. Therefore, analysts remain skeptical over materialisation of an ambitious revenue target. Furthermore, FY13 being the election year, expenditures are likely to remain on the higher side. As a result targeted reduction in the fiscal deficit for the year can not be achieved.

Overly Ambitious
As anticipated, government has recommended populist measures to consolidate its vote bank for the forthcoming general elections. Various benefits are extended to individuals as well as industrial sector while no new tax has been imposed. However, a few measures to increase documentation and widen tax bracket have also been proposed.
Basic income tax exemption for individuals and AOPs has been raised to Rs 400,000 p.a. from Rs 350,000 earlier. While, tax slabs are recommended to be slashed to five. Moreover, tax on income will be levied at incremental rates as the income rises; compared to previous practice where full income was taxed at the same rate.
Customs duty is proposed to be reduced to 30% from 35%. This measure will help reduce prices of numerous food items, cosmetics, auto assemblers, furniture manufacturers and arms and ammunition sector.
Rate of turnover tax is recommended to be reduced to 0.5% against 1% earlier. This will eventually help loss making entities and benefitting small textile units, chemicals and personal good manufacturers.
Withholding tax on profits received from intra group lending has been abolished. This would not have any significant impact on registered tax payers as it is adjustable to income tax.
Single rate of GST at 16% will be implemented impacting telecom, chemicals and other sectors and thus attracting higher sales tax collection.
For increasing documentation in the economy, industries are being made withholding agents and will be required to deduct one percent withholding tax from distributors and dealers. FED on lubes would be abolished which will bode positive for local lube manufactures if impact is not passed on.

Stock Market
According to BMA Capital report the budget has no surprises for the stock market. Recently issued finance amendments are included in the Finance Bill FY13 in which CGT is to be kept fixed till FY15 and NCCPL has been made withholding agent for the collection of said tax.
To promote investment in Initial Public Offerings (IPOs) and life insurance, the allowed tax credit is proposed to be increased to 20% or Rs1.0 million from 15% and Rs0.5 million; whichever is lower. The minimum lock-in investment period has been proposed to be reduced to 2 years from 3 years.
To promote investment in capital markets throu gh asset management companies, FED on services of these companies is proposed to be abolished.
According to our analysis, the proposed hike in taxes on banks from dividends from money market funds and income funds would attract fresh inflows to equity markets as tax on dividend income from equity funds has been kept at 10%.

It has been proposed to reduce FED on local cement sales by Rs100/ton against an expectation of Rs200/ton. However, it will still be a positive trigger as the relaxation in FED by Rs5/bag is expected to be gradually absorbed in the retention level.
The decision to reduce the custom duty on shredded rubber scrap to 10% from 20% will have a nominal impact on margins as coal will continue to remain the dominant source of fuel.

While corporate tax rate has been maintained at 35%, proposal of increase in tax rate on investments in treasury bills has also not materialised – this is to be taken as a sigh of relief for the sector and should result in respite in stock prices following the underperformance off-late.
Tax rate on dividends received from investment in money market and income funds will be increased in two phases. The tax rate will be increased to 25% in FY13 and 35% in FY14. This will evade the tax arbitrage opportunity for banks and bodes negative for banks. However, analysts are of the opinion that banks would opt for bonus option, instead of cash dividends to minimise the adverse impact of proposed measure.

Feedstock gas cess has been increased by Rs103/mmbtu for all fertiliser plants except Engro's new plant and Fatima Fertiliser. This is likely to raise cost of production of urea by Rs130/bag. However, the sector may face difficulty in passing on the impact due to over supply situation in urea market.

The proposed decrease in turnover tax from 1% to 0.5% bodes well for the loss making entities and small companies in the sector. To discourage Presumptive Tax Regime (PTR), the tax rate on imports has been curtailed to 3% from 5%. The decrease in the cost of imported raw materials and other items will provide further relief to the manufacturers. Further, the decision to reduce tax rate on exporters from 1% to 0.5% will provide additional impetus.

The existing 35% custom duty on imported CKD units is proposed to be slashed to 30%. This reduction in custom duty will lead to lower prices and consequently higher sales volumes for the auto assemblers post June 2012. Custom duties on other auto parts would also be reduced by 5% hence may bode negative for local part manufacturers as it a source of protection to the industry. However, this will bode positive for local assemblers if impact is not passed on completely.

A 3.5% cut in GST will have positive implications on the telecom sector, particularly PTCL and cellular companies, which are under the tax net of 19.5% at present. This downward revision will result in lower calling rates and subsequently higher traffic for the industry.

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