June 10, 2021 (MLN): With IMF-mandated fiscal discipline, the Federal Budget 2022 is likely to lift growth prospects with a focus on sound structural reforms side by side.
After a 0.47% contraction in FY20, Pakistan’s GDP registered a V-shape recovery as the GDP growth rate for FY21 is estimated at 3.94% whereby most of the sectors of the economy showed signs of revival. This budget envisions revving up the growth engine to achieve sustainable growth at 5-6% in the coming fiscal year as vaccination drive gains traction.
It is likely that this budget will provide significant support for demand throughout the economy, from construction to the pharmaceutical sector, but with resilient business conditions, attention is more needed on the supply side.
The Federal Budget for FY22 is expected to be positive for the equity market along with different sectors. Construction-related sectors, Export-oriented and Agriculture based sectors, in view of market analysts, will be potential beneficiaries from this upcoming budget announcement.
Given the recent economic recovery, there are high hopes attached to this budget. And now, several sectors are looking forward to a support package from the newly appointed Finance Minister, Shaukat Tarin. Discussed below are some proposed measures for budget FY2022 and the possible impacts, as per market analysts.
CEMENT
Proposal: Allocation of PKR900bn for Federal PSDP
Market view: Positive. This will likely sustain the present momentum in demand – hitherto led mostly by the private sector.
Proposal: Removal or reduction of 5% duty on coal
Market view: Positive. This will reduce the overall cost and improve the sector's margins and profits. Furthermore, it is also beneficial for other industries having a dependency on coal captive plants (i.e. NCL, CEPB, etc).
Proposal: Removal of Federal Excise Duty (FED) on cement
Market View: Positive. The stepwise reduction of FED may translate into augmented offtake and improved profitability. Though, there might not be such relaxation given the government’s aggressive revenue collection target.
Proposal: Restoration of tax credit on Greenfield investments
Market View: Positive. It has been recommended by Pakistan Business Council (PBC) to restore exemption from income tax on Greenfield investments for a period of 5 years as generally Greenfield project incurs losses in the first three years. This would be extremely beneficial from a profitability perspective.
FERTILIZER
Proposal: Agriculture package
Market view: Positive. The government is planning to introduce a reform package worth PKR 110bn. This includes subsidy on DAP fertilizer amounting to PKR 40bn for around 2million tons which translates to PKR 1000 per bag. This proposal will bode well for the whole fertilizer industry.
Proposal: Elimination of imbalance in input and output Sales Tax
Market View: Neutral. The imbalance is resulting in cash flow constraints. Currently, the industry is paying input Sales Tax of around PKR 101 to PKR144 per bag on Urea against output Sales Tax of around PKR 34 per Urea bag. This reduction of sales tax on input will ease cash flows though it is unlikely to happen.
Proposal: Normal tax regime
Market view: Neutral to Positive. The restoration of the normal tax regime will be beneficial for fertilizer importers who are taxed under the minimum tax regime.
TEXTILE
Proposal: Restoration of zero-rating status
Market view: Neutral. This will reduce the cost of doing business as export-oriented companies will be eligible to claim tax rebates on input levels. This would also improve liquidity for exporters. APTMA proposed measure is unlikely to be restored as FBR and other authorities have already introduced Fully Automated Electronic Sales Tax Refund (FASTEST).
Proposal: Reduction in turnover and corporate tax rate
Market View: Neutral. This will improve the sector’s profitability going forward especially for loss-making textile units. Though the government is following pro-export policies, the tax on export income is unlikely to be reduced.
Proposal: Concessional financing under Long Term Financing Facility (LTFF) & Export Finance Scheme (EFS)
Market view: Positive. The proposed amount of PKR200bn is expected to be allocated to ensure short-term credit availability and long-term finance facility to exporters with subsidized borrowing rates. This will accelerate the growth of textile exports further.
Proposal: Continuation of duty-free import of Cotton
Market View: Positive. The government abolished a 5% customs duty on the import of cotton yarn for the period till 30 June, 2021. The continuation of this proposal will not only encourage local production but also ensure the timely availability of textile products in international markets.
STEEL
Proposal: Removal of duty on import of scrap
Market view: Positive. Currently, the regulatory duty on the import of scrap is at 5%. This will bring down reduce the cost of manufacturing rebar, hence; improve local long steel players’ profitability.
Proposal: Reduction in customs duty to 5% for flat steel products
Market View: Neutral. This will bring down the cost of production (ASTL, CSAP, MUGHAL, INIL and ITTEFAQ would benefit). This will provide a much-needed cash buffer for the industry as it operates on thin margins.
Proposal: Allocation of PKR 900bn for PSDP
Market view: Positive. Higher allocation in PSDP will spur already robust construction demand in FY22.
When Mettis Global approached National Steel Advisory Council Chairman Towfiq Chinoy for his comments on budget FY22, he took a longer-term view than simply the upcoming budget statement. “Commerce Advisor Abdul Razak Dawood has a very clear view on the industry: he knows the situation on the ground and what needs to be done to promote it. The economic team has signaled to the business community that they are doing the best with available resources and constraints. So we are hopeful that things will improve further over the remaining course of the government’s term,” he commented.
Specifically in the budget on Friday, Mr. Chinoy is expecting only one major change. “It seems that the duty on hot-rolled coil – that currently stands at 13% – will be reduced to the extent of regulatory duty, with that RD component removed entirely.”
BANKS
Proposal: Reduction in corporate tax rate from 35% to 29%
Market view: Neutral. The said proposal would boost the earnings of the banks; however, given that the banking industry is a major source of tax revenue, it is expected that it is unlikely to happen.
Proposal: Abolition of Super Tax
Market view: Neutral. Super tax is currently applicable at 4% which takes the total effective tax rate at 39%. The implementation of the said measure is quite low due to tax targets in the upcoming fiscal year.
Proposal: Reduction of income tax rate on Micro Finance Banks to 20%
Market View: Neutral to Positive. There would be more chances of implementation of this proposal given the government’s focus on broadening the SME sector whereby nearly 90% of companies are working under this category.
AUTOMOBILE
Proposal: Import of five-year-old used cars
Market view: Negative. Increasing the age limit for imported cars from 3 years to 5 years may hamper local preparations as consumers will change their buying preference because 5 years old used cars will be relatively cheaper. However, the proposal is unlikely to be implemented, as it would increase imports and put pressure on foreign exchange.
Proposal: Reduction in turnover tax from 1.50% to 0.75%
Market View: Neutral. This reduction in turnover tax rate will help new players as well as loss-making automobile companies, as the auto sector is operating on low margins with high turnover. This will lead to new investments in the automobile sector
Proposal: Removal of Federal Excise Duty
Market view: Neutral to Positive. Removing FEDs (2.5% -7.5%) on locally manufactured cars will reduce car prices and improve sales. Analysts are of the view that government may consider removing the FED on vehicles with an engine capacity of up to 800c.
PHARMACEUTICALS
Proposal: Zero-rated sales regime
Market view: Neutral to Positive. This will assist pharmaceutical companies in handling their liquidity and cash flow issues along with withholding sales tax at separate levels of value addition.
Proposal: Reduction on tariff on raw material/APIs
Market View: Positive. This will benefit most of the local pharmaceutical manufacturers as most of the raw material used by the companies is imported. It is expected that government would reduce tariffs mainly on essential drugs to support the pharmaceutical sector and fight against COVID-19.
Proposal: Allocation of Rs100bn for COVID-19
Market view: Positive. The government is allocating this fund primarily to meet the country's vaccination needs, which in turn will provide benefits for the health sector as a whole.
Talking to Mettis Global, Ayesha Tammy Haq, the spokesperson of Pharma Bureau – a body of multinational pharmaceutical companies -emphasized the sector’s demand for rationalization of duties and taxes. “Unlike other industries, we can’t pass on the prices since the industry is heavily regulated. Therefore, duties on import of inputs and taxes should be reduced. The government needs to start looking at pharma more seriously and encourage companies to come back to Pakistan and invest as well as expand their research and development,” she said.
On the signals coming from Islamabad, she seemed hopeful. “So far, everyone seems to be hearing and the finance minister has engaged with all chambers so we are looking at it positively.”
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