The Budget & Tariff Policy: From a Pakistani Retail Investor Perspective.

Fiscal Deficit

The previous budgetary cycle made some half-hearted attempts at reducing the deficit, but the current one makes no such effort as the government states that is has been designed to stimulate market activity and economic growth.

• The government will run a 7tn deficit!

• More than 6tn of it will be financed by domestic borrowing.

This puts a non-binding limit on the equities market as usually Foreign Investment in the stock market is not boosted by fiscal worries of the sovereign.

Interest Income

The government increased the taxation on Interest income during the last cycle from 15 to 20 percent - a significant raise. That part has not changed but there is renewed effort from the FBR in tracking this and compliance, so investors need to be vigilant in their tax filings.

Friendly Real Estate Taxes

In order to increase documented filing for real estate transactions the overall taxes - advance/withholding, have effectively been halved for both sellers and buyers. This relief has been extended to non-filers as well with the implication that such an act would get them into the tax net.

• Filers’ sale‑side advance tax: cut from about 4.5–5.5% (depending on property value) to a flat 2.75%

• Filers’ purchase‑side advance tax: cut from 1.5–2.5% (slab‑based) to 1.25% flat.

Super Tax Easing

The 'Super Tax' regime was always a stop gap measure that was designed to help the sovereign from defaulting and the related adverse outcomes. The government has rationalized most of the statutes of the super tax.

• The overall rate has been reduced from 10% to 8% but is levied on those making above 500mn.

• The 10% rate applies to those with windfall profits.

• Companies who predominantly export their products are exempt from the tax.
  

The pricing for stocks that are on the brink for this is bound to fluctuate around earnings seasons depending on if the market expects the thresholds to be passed.

Fuel Levy

A 5% fuel levy has been implemented which is bound to have more longer term effects than the volatility in oil prices that has been experienced from the war. As Oil prices normalize following negotiations a plateau will develop.

Given the sharp increase in prices of oil from the shock most logistic and transport companies have already incorporated the relevant price increases. The size of the reversal in the price of oil should mean that overall prices should not get an inflationary effect.

Customs & Duty Regulation

The government in its bid to increase exports has also decided to rationalize the tariff policy - especially around raw materials and intermediate goods. This bodes well for companies that are in the Food and Textile spaces that have capacity and plans to expand their export footprint.

• Tax collection on export proceeds has been reduced from 2 to 1.25%.