June 10, 2019 (MLN): The bizarre tax revenue target of Rs 5.55 trillion is the hallmark of the 2019-2020 National Budget. Under the current circumstances, it is fair to assume that the government will have to leave no stone unturned in its quest to achieve the set target.
The Upcoming budget will be overwhelmingly negative for the capital markets as well as industries such as Cements, Steels, Automobiles and consumers sectors due to slow down in economy, limited spending by the government, and tax measures. On the other hand, Banks and E&P are expected to benefit from the current environment.
Having said that, we attempt to explore the impacts of expected revenue measures in the forthcoming budget on Banks and E&P sector.
Since no major changes are expected in the current taxation on Banks except for increase in tax on investment in government instruments, this ultimate impact bank’s earnings is likely to be negative.
However, PBA has urged the government to reduce Super Tax of 4% and reduction in income tax collected on cash withdrawal exceeding PKR 50,000 at 0.3% from filers and 0.6% from non-filers. If this step is implemented, it will be positive for deposit mobilization of the banking system and will uplift bank’s earnings.
On the contrary, one key event in the IMF backdrop would be the Treasury Single Account (TSA), as its implementation could squeeze liquidity.
Additionally, the obligation for the account holders with balance over PKR 500,000 to avail Tax Amnesty Scheme in a bid to widen the tax net, might affect future bank deposits.
Budget FY20 is being prepared with a planned fiscal deficit of Rs. 2.7 to 2.8 trillion (around 6.3% of GDP), with much of financing of this deficit being done by commercial banks. In a scenario of high interest rate, this will be favorable for bank’s other income especially originating from investment in Govt. securities –PIBs &T-Bills and FX related income.
Coming to E&P sector, Al Habib Capital markets Limited highlights in its research note that the proposed reduction in corporate tax rate on E&P companies and elimination of exemptions and special treatments being proposed under new petroleum policy to foreign E&P companies, in a present scenario of tight fiscal position for FY20, these measures are unlikely to be implemented. If implemented, their effect will be neutral.
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