Cement Sector – Adversity turned into advantage!

June 16, 2020 (MLN): Cement Sector is one of the handful industries of Pakistan that have benefitted the most from the Federal Budget 2020-21, thanks to measures proposed by the Government in the form of several tax reliefs and reduction in FED.

For the uninitiated, the Government has decided to slash the Federal Excise Duty by Rs. 12.5/bag, bringing it down to Rs. 87.5/KG. While this is not exactly as much as the sector was expecting, it will nonetheless help in boosting the profitability of the cement industry in the upcoming periods.

A recent report by Ismail Iqbal Securities, however, suggests that the decline in FED will not prompt the cement sector to decline prices. This is because the sector was not able to increase prices in the past due to negotiations done with the Government, which entailed that the tax reliefs to the sector in the form of the budget would be given in exchange for no increase in cement prices.

Similarly, the decision to discontinue additional custom duty on the import of coal by 2% also came as another positive driver for the sector. It is pertinent to note that the customs duty in the previous year was 5%, whereas now it has been brought down to 2%, hence this will help in cost reduction and profitability boost for the cement industry.

Likewise, the amounts allocated to the Public Sector Development Program may also leave a positive impact on the sector, as the demand for cement will increase as a result of a boost in construction activity. The overall outlay for the PSDP projects is around Rs. 650 billion, which is 15% higher than the revised figures given in the previous budget.  

The budget has also proposed measures for the construction sector, which will directly impact the activity of the cement industry. These measures include a reduction in holding period and tax rate on the immovable property from 8 years to 4 years, which will result in there being no difference between an open plot and a structured property. Subsequently, there shall be no capital gain tax if the holding period for that property exceeds the prescribed limit.  

Nevertheless, a lot of expectations and speculations remained unfulfilled in the Federal Budget, some of which include a reduction in sales tax on some of the major construction projects across Pakistan, such as CPEC, Dams, and other housing projects.

Another setback from the budget is the reduction in development expenditure by 16.6%, which according to BMA Capital, was imperative due to the tight fiscal position of the country. However, the impact of this measure is likely to be negated by an increase in the private sector activity, especially after the announcement of the construction package.  

Fortunately, or unfortunately, the outbreak of COVID-10 has prompted the Government to focus more on the revival of the construction sector, which will automatically uplift the cement industry as well. Not only this, but sectors such as Steel and Energy are also going be the beneficiaries of it too.

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