Budget FY22: Many things to cheer for Capital Market

June 14, 2021 (MLN): Staying true to their pre-budget promises, the PTI government on Friday presented its 3rd budget in National Assembly, with a theme of sustainable and inclusive growth to be achieved through a bottom-up approach.

Certainly, it has been received positively by the public and private sectors as there was no additional tax burden announced due to the ongoing Covid-19 emergency and some significant relief majors for some sectors.

For the capital market, it has emerged as an astonishing supporter, as an array of tax concessions, duty drawbacks, and pro-growth policies were announced.

While the PSX has recovered handsomely from its Covid-19 inflicted lows in March 2020, it seems that the government is aiming to elevate people’s wealth and savings ahead of the next general elections in 2023.

After a long outstanding demand from the investor fraternity, the government gave a major incentive to the Pakistan Stock Exchange (PSX) by reducing the Capital Gain Tax (CGT) rate on the disposal of securities to 12.5% from 15%. This will encourage investment in Pakistan Stock Exchange (PSX), resulting in higher tax collection from the disposal of securities. The government also guided that CGT may progressively decline in the coming years. Simultaneously, the Budget also proposes an increase in CGT on real estate investment beyond certain thresholds, this also likely to improve the outlook for liquidity on the PSX.

Another significant demand from the capital market was the reduction of Withholding Tax (WHT) on income from margin financing transactions. Keeping this request at hand, the government proposed to delete WHT of 10% on NCCPL Margin Financing. This is also a positive sign for the stock market as this will likely increase the use of leveraged products at PSX. An upward shift in the level of margin financing can be expected which currently stands at Rs11.45bn, down from its 1-yr high of Rs14.03bn recorded in Feb’21.

At the same time, the government has removed WHT on members of the stock exchange. In addition, the turnover tax for non-energy companies has been reduced from 1.5% to 1.25%, and for refineries, from 0.75% to 0.5%. The rate for OMCs and gas utilities remained at 0.75%. The rate was last revised up by 0.25ppt in the FY20 Budget. Both the measures are positive for the stock market as they will likely boost trading activity at PSX and also enhance the investor base in the country.

On the downside, tax credit on new listings at PSX has been abolished. Previously new companies listed on PSX could avail of 20% tax credit for the first two years and 10% for the subsequent two years. This change could dissuade new entities from getting listed on PSX. New listings have remained persistently low at PSX historically due to multiple reasons. This adjustment could further slow down IPO activity in the country.

The stock market, which generally reacts well to the growth budgets, has been displaying disappointing performance post-budget announcement, where the benchmark KSE-100 index has gained only 174 pts as of today and settled at 48,481 points level. Nevertheless, a growth-oriented budget would strengthen investors sentiments going forward as they foresee a rise in corporate earnings. Moreover, AKD Research in its report also highlighted that keeping sectoral development aside, CGT development alone can potentially propel the market above 50k level.

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Posted on: 2021-06-16T20:37:00+05:00