JS Global Capital Limited – Research
Karachi, June 03, 2016 (PPI-OT): Budget FY17 Initial Impressions: Pro-agri, pro-growth with fiscal discipline – Fertilizers, Textiles key beneficiaries
The PML-N government unveiled its fourth budget today with a total outlay of Rs4,895bn (+10% YoY) for FY17, targeting a GDP growth of 5.7% (FY19 target: 7.0%) and a fiscal deficit of 3.8% (FY19 target: 3.5% of GDP) for the year. The focus of the budget centered on the (1) revival of the agriculture and the export sectors – which were key disappointments during the outgoing year and (2) growth.
The government has proposed to (1) reduce Sales Tax on Urea to 5% (a subsidy of Rs36bn) to reduce its price to Rs1,400/bag from Rs1,780/bag, (2) provide additional subsidy of Rs10bn on DAP to reduce its price to s2,500/bag from Rs2,800/bag (Rs500/bag subsidy already available), (3) to reduce tube-well electricity cost by Rs3.5/unit and (4) remove 7% sales tax on pesticides.
For exporters, it has been proposed to (1) extend zero-rating for five key export sectors (i.e. textiles, leather, carpets, sports goods and surgical instruments), (2) continue existing scheme on Drawback of Local Taxes, (3) reduce export refinance rate to 3%, (4) allow the continuation of duty-free import of machinery, and (4) clear sales tax refunds by August 31, 2016 amongst other measures. In terms of development expenditure, government has set PSDP at Rs1,675bn with federal component of Rs800bn (vs. a revised target of Rs661bn for FY16), whereas for the industrial sector extension in tax credits have been provided for (1) Investment in Greenfield Industrial Undertaking, (2) Balancing, Modernization and Replacement (BMR) and (3) establishment of new industry and expansion of existing plant.
In order to achieve fiscal discipline, the government has proposed to increase cost of non-compliance with tax laws by continuing/enhancing its policy of differential taxation for filers and non-filers. Net Revenue Receipts have been set at Rs2,780bn (+12% YoY) with total Internal Resource Mobilization of Rs3,572bn (+5%). Certain revenues measures have been undertaken which includes (1) extending Super Tax for another year, (2) increasing FED on Cement to Rs1/kg from 5% of MRP (~Rs0.4/kg), (3) rationalizing Capital Gains Tax on immovable Property to a uniform rate of 10% for a sale within five years of purchase (two years previously), (4) taxing Builders and Land Developers, (5) enhancing sales tax on steel sector, ship breakers and steel melters and (6) enhancing FED on Cigarettes and Aerated Waters.
PSX vantage point:
From the market’s perspective, the budget is largely neutral to positive. Net positive sector measures are likely to be slightly dampened by increase in Capital Gains Tax (please see below) and Tax on Dividends for non-filers (to 20% from 17.5%) and no mention of removal of tax on bonus shares in the speech. To broaden capital market breadth, Tax Credit for Enlistment has been extended to two years from one year.
It is also proposed to reduce the condition of 100% fresh equity to at least 70% equity for 100% tax credit for establishing new industry through issuance of new shares.
Sector specifically, extension of Super Tax is likely to hurt earnings across the board (as expected), though reduction in corporate tax rate by 1% to 31% will somewhat mitigate its impact. Fertilizers are likely to gain the most, with an outstanding package announced for the agriculture sector (details mentioned above). Textiles are likely to benefit as well on the back of export promotion measures proposed. Tyres (GTYR) and Asphalt (APL) manufactures too have emerged as key beneficiaries thanks to removal of 30% regulatory duty on Bead Wire (a key raw material in manufacturing of tyres) and allocation of Rs188bn (+18% YoY) towards construction of highways respectively.
For Cements, the budget has been a mixed bag where higher PSDP allocation bodes well for local demand however increase in FED will keep investors guessing whether the manufacturers will be able to pass on the full impact to the consumers. Tax credits for establishment of new industry and expansion of existing plant will be a positive for expanding cement manufacturers. Insurance companies are likely to be disappointed with a revised tax structure where all sources of income will be taxed at a uniform rate (vs. a much lower average tax rate previously).
EFOODS too is likely to lose out from the removal of zero-rating on packaged milk. Steel sector too is likely to hurt from enhancement of fixed rate basis on steel sector, ship breakers and steel melters. Autos are likely to take a hit on financing backed sales as advance tax of 3% is proposed for non-filers.
Other key measures include:
Increase in WHT on broker commission to 0.2% from 0.1%.
Increase in minimum wage to Rs13,000 from 14,000.
Increase in tax rate on dividend income from mutual funds for non-filers.
Custom duty slabs of 10% and 15% substituted with 11% and 16% slabs respectively.
Concession of Customs duty for Dairy, Livestock and Poultry Sectors from 5% to 2%.
Increase in Custom duty on Cement Clinker to 11% from 2%.
Retail sales of locally manufactured finished goods of the five export sectors to be subjected to sales tax of 5%.
FED on Advertisement on CCTV / Cable TV, Shipping Agents, Banking Companies, Insurance Companies, Cooperative Financing Societies, Modarbas, Musharikas, Franchise Services, Stevedores, Stock Brokers, Forex Dealers etc. services on which provinces are collecting sales tax to be withdrawn.