The incumbent Government unveiled its second budget today with an outlay of Rs4,302bn (+8% YoY), aligned towards (1) controlling fiscal deficit and (2) investment led growth. Contrary to larger belief, the government resisted large increase in taxes while also proposed reduction in maximum general tariff rate to 25% from 30% previously. The corporate tax rate has also been proposed to be reduced to 33% from 34%. That said the government has introduced Alternate Corporate Tax (ACT) at 17% of accounting income (excluding the exempt income) to discourage perpetual declaration of losses or very low income. The companies shall have to pay ACT or corporate tax whichever is higher, however ACT paid is proposed to be carried forward up to 10 years.
From the market’s vantage point, the budget announcement was a mixed bag. As expected, the government increased Capital Gains Tax (CGT) to 12.5% (instead of 17.5%) from 10% on short term holdings and to 10% (from 8%) on long-term holdings. However, the definition of short-term holding period has been raised to 12 months from 6 months and long-term holding period to 12-24 months from 6-12 months. Moreover, it is proposed that bonus shares be treated as dividend and taxed deducted at 5% of the ex-bonus price while foreign institutional investors (FIIs) are proposed to be brought under the withholding tax regime. Meanwhile the budget entailed +24% YoY higher allocation to PSDP and announcement of low cost housing projects (+ve for Cements); reduction in export refinance rates to 7.5% from 9.4%, reduction in long term finance facility to 9% from 11.5% and extension of duty free import of textile machinery for another 2 years (+ve for Textiles); and removal of 10% FED on 1800CC above vehicles (+ve for Indus Motors). Other budgetary measures include:
§ Replacement of capacity tax on aerated waters with normal tax regime
§ FED on the cement sector to be replaced from specific basis (Rs400/ton) to 5% on retail price
§ Retention of zero-rating facility for the dairy sector
§ Reduction in rate of sales tax to 10% from 16% on tractors
§ Reduction in rate of FED on Telecommunication Services to 18.5% from 19.5%
§ Proposed to exempt the profits and gains of coal mining projects in Sindh supplying coal exclusively to power generation projects and also to tax their dividends at reduced rate of 7.5%
§ It is proposed that Mutual Fund distribute dividend in cash only and that the rate of tax applicable to the dividend distributed by Mutual Fund be same as is applicable to class of income received by Mutual Fund. However, to encourage Mutual Funds the rate of tax on dividend distributed by Mutual Fund to companies in respect of interest income shall be 25% instead of 33% applicable to companies.