June 14, 2022 (MLN): Amidst the worrisome macros, political chaos, and under IMF’s pressure to unlock a much-needed tranche, the coalition government managed to unveil the federal budget for the fiscal year 2023 contrary to the expectations of extremely tight measures.

Garnered with ambitious targets, the budget for FY23 with a total outlay of Rs9.5 trillion is aimed to increase the overall revenue target through a significant increase in taxes. At the same time, it also offers relief to the lower strata of the population.

Unlike the previous year’s growth-oriented budget, this year, the government has taken tightening measures for fiscal consolidation in a bid to convince IMF. Accordingly, the government has set the overall revenue target of Rs7trn in the FY23 budget, up 17% YoY along with the abolishment of tax credits, and reeling off subsidies on energy and fuel.

Economic experts have termed this target unrealistic owing to the expected economic slowdown and optimistic targets set for Petroleum Levy (PDL), and Gas Infrastructure Development (GIDC) in FY23.

Keeping the approach of balanced growth and achieving the export target of $35bn, the government has also announced relief measures to improve the productivity of the agriculture and industrial sector.

Despite IMF concerns, the government decided to give a raise of 15% in the salary of the government employees, as well as a 5% increase in the pensions for retired officers. Meanwhile, a fixed tax rate is also introduced for small retail investors ranging from Rs3000 to RS10,000 which may be collected through electricity bills.

For the Public Sector Development Program (PSDP), the budget envisages the allocation of Rs800bn which is less than 11% of the previous year. The budget is also offering notable relief to the lower strata of people in terms of BISP.

A major highlight of the budget FY23 was the taxation levied on the real estate sector to streamline the distortions and remove inequality amongst asset classes.

Accordingly, Immovable property worth more than Rs25mn will be taxed at 1% of the fair market value or 20% of deemed rental income. The personal residence would be exempted from this tax.

In addition to it, the advance income tax on the transaction of real estate is to be increased from 1% to 2% for filers and 5% for non-filers.

IMF wants more

Though the coalition government has tried its level best to follow the balanced growth approach as it levied new taxes and at the same time relief measures to the poor strata, the IMF has still raised concerns.

Additional measures will be needed to bring Pakistan's budget for FY2022-23 in line with the key objectives of its International Monetary Fund program, the lender's resident representative Esther Perez Ruiz said on Monday.

Our preliminary estimate is that additional measures will be needed to strengthen the budget and bring it in line with key program objectives,” she added.

Federal Minister for Finance and Revenue Miftah Ismail on Saturday said that the IMF had expressed concerns about the budget numbers, including fuel subsidies, a widening current account deficit, and the need to raise more direct taxes.

He, however, added that his government was confident they could adjust the budget to bring the IMF on board and was hopeful of securing a successful review this month.

Pakistan is halfway through a $6 billion, 39-month IMF program that has stalled over the lender's concerns over the status of some of its objectives, including fiscal consolidation.

Experts are of the view that IMF’s resumption program is crucial to restoring economic stability so that the equity market and PKR would be able to get a breath of fresh air.

Positive, Negative, or Neutral?

From the equity market perspective, the measures taken by the government for budget FY23 are expected to be negative for banking, auto, real estate, and steel whereas pharma, chemical, entertainment, media, tractors, and packaging will enjoy a positive impact. However, the proposed measures will have no direct impact on fertilizer, oil, gas, and cement.

Overall, this budget remains negative to neutral for PSX market participants. In a series of major measures, capital gain tax on stocks has been increased to 15% for less than 1 year holding period.

Along with this tax credit availed by individuals on investments in mutual funds, health insurance, and pension funds has also been eliminated. Along with this, restriction of carrying forward in subsequent years will also hurt loss-making companies in the listed space, a report by Ismail Iqbal Securities noted.

Budget in the eyes of Analysts

With regards to the impact of the budgetary measures taken by the coalition government, analysts are of the view that the stringent tax measures have been put on the real estate sector by the increase in CGT, Advance Tax, and imposing a tax on the immovable property would discourage investments in real estate sector and would bring flows to the formal sector, where PSX could also be a major beneficiary.

However, the market would not see significant flow overnight. In order to bring the momentum to the market, the government has to bring back investors’ confidence in terms of the IMF tranche, Fahad Rauf, Head of Research at Ismail Iqbal Securities told Mettis Global.  

Wajid Rizvi, Head of Economy and Strategy at JS Global said, “Despite the tax incidence over real estate in an attempt to provide a level playing field amongst all asset classes, the inflow of investment towards PSX would not come in a day as people are shy from the local bourse due to the ongoing economic uncertainty.”

All eyes are on the IMF nod since the resumption of the IMF program is seen as a cornerstone in navigating the crisis for Pakistan and could be the elusive trigger that leads to unlocking of valuations due to political and economic uncertainty, he added.

The increase in taxation will hit the profitability of almost all major sectors. Thus, the incremental tax burden of 2% on taxable income alongside the additional 6% tax charge on the banking sector barring the supplementary charge on income from fixed-income investments will dampen sentiment, Saad Hashmi, Research Director at BMA Capital said.

Pertaining to the abolishment of the tax credit on mutual funds, he was of the view that the drop in income tax on the salaried class will partially offset the burden of a tax credit.

However, for the higher salaried class, it is expected that the local bourse will see higher participation in following the roll-back of tax incentives on investment in mutual funds by private individuals and the incidence of taxation on rental income from immovable properties.

What does business community say?

Budget FY23 received mixed responses from the business community. Irfan Iqbal Sheikh, President of FPCCI lauded the government’s effort and described it as balanced, growth, and export-oriented. He also appreciated the incentives included in the budget as they would help to boost economic activity.

On the other hand, Waheed Ahmed, Patron General of All Pakistan Fruit and Vegetable Exporters Association told Mettis Global that the Federal Government has ignored the challenges being faced by the agricultural sector in the Federal budget for the fiscal year 2022-23.

30% reduction in the Federal Budget to encounter stiff challenges of the climatic change is highly concerning. He explained that instead of making agricultural inputs cheaper, the government has increased the sales tax rate on fertilizers which is a matter of grave concern.

A special relief package is required to reduce the production cost of the agricultural sector so that foreign exchange can be earned by exporting agricultural commodities while meeting domestic demands. he added.

While speaking to Mettis Global, Mehreen Ilahi, President of the Women Chamber of Commerce said that increase in taxation along with rising electricity and gas prices would directly hit the profitability of the businesses belong to the SME sector.

All in all, the budget gives an impression of balanced growth however, it will likely be tweaked further to fulfill the requirement of the IMF.

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