PAKISTAN FY17 BUDGET REVIEW June 2016

Transcription

1 Best Local Brokerage House Brokers Poll 2011, 2012, 2013 & 2014 PAKISTAN FY17 BUDGET REVIEW June 2016 Topline Securities, Pakistan REP-057

2 Executive Summary After achieving macroeconomic stabilization during the last three years, Pakistan Govt. has now shifted its focus towards growth as it unveiled pro growth FY17 budget. The focus of the budget remained on revival of Agriculture sector that contributes 21% of GDP and Textile sector that is the main driver of country s exports. The budget was largely neutral for the local Equity Market as taxes on dividend and capital gains were unchanged, other than for non-tax filers, which we believe will have minimal impact as most investors are tax filers. We expect Pakistan market to gradually improve post budget due to 1) incentives for Fertilizer and Textile sectors and 2) Incentives for industrial sector and new listings. Though budgetary measures are negative for insurance and neutral to negative for banks and consumers, we believe that pro-growth policies of the current Govt. and positive macroeconomic outlook will gradually filter across the board and help keep market sentiments in positive territory. 2

3 Stock Market Expected Measures & Impact Capital Gains Tax (CGT) The Govt. has not made any changes in capital gain tax for tax filers, which is positive for market as most investors, we believe, are filers. Currently, 15% CGT is levied on sale of shares within 12 months, 12.5% on sale between months and 7.5% tax if sold between 2-4 years for filers. For non-filers, capital gains tax will be 18% (compared to 15% for filers) if holding period is less than 12 months. If holding period is between 12 to 24 months, then the rate will be 16% (compared to 12.5% for filers). If holding period is 24 to 48 months then the rate will be 11% (compared to 7.5% for filers). Stock Market: CGT over the years Tax Year <6m Rate of tax where holding period is > 6m but < 12m or more <12m 12m but <24m 24m or more but < 48m % 8.0% % 8.0% % 8.0% % 12.5% 12.5% 10.0% % 15.0% 15.0% 12.5% 7.5% Filer 15.0% 15.0% 15.0% 12.5% 7.5% Non Filer 18.0% 18.0% 18.0% 16.0% 11.0% Source: Budget Document, Topline Research 3

4 Stock Market (contd.) Tax on Dividend Income The Govt., similar to CGT, has not changed the tax regime on tax filers for dividend income, which stands at 12.5%. However, for non-filers, tax on dividend income has been increased from 17.5% to 20.0%. Alternative Corporate Tax In Federal Budget FY16, the Govt. imposed Alternate Corporate Tax (ACT) of 17% of accounting income as companies were required to pay higher of the corporate tax or ACT. The Govt. in this budget has proposed to collect advance tax on ACT, which is expected to raise additional taxes of Rs16bn from companies. Tax on Bonus Shares Ever since imposition of 5% tax on bonus shares, there has been a major decline in announcement of bonus shares by listed firms. The Govt. in this budget has not changed the tax regime for bonus shares. Corporate Tax & Super Tax Corporate tax rate has been proposed to be reduced to 31% in FY17 from current 32% in line with the Govt. policy to reduce corporate tax rate gradually. This 1% reduction will increase profits of non-banks by 1.5% and is already incorporated in our forecasts. Super tax that was levied in Tax Year 2015 to meet revenue needs is being extended to Tax Year As per income tax ordinance, companies who are earning more than Rs500mn in pre-tax profits will be subject to 3% tax (4% for banks). This will have negative earnings impact of ~3% on our sample companies. 4

5 Stock Market (contd.) Incentives for new listings Currently, there is a 20% tax credit for new listings on Pakistan stock exchange for 1 year. In order to encourage enlistment of companies on PSX, tax credit is being extended to 2 years. At present, 100% tax credit on tax payable is allowed if 100% fresh equity is raised through issuance of new shares. This tax credit is allowable for five years from commercial production. It is proposed to reduce condition of 100% fresh equity to 70% equity and tax credit would be allowed proportionately on owned new equity. This is expected to further promote new listings on PSX. Taxation for not distributing dividends In last year s budget, the Govt. imposed tax on reserves if listed companies (other than bank/modaraba) did not distribute dividends. This led to overall higher dividend payouts and improved investor sentiments. This measure remains enforced and is positive for market sentiments. Increased tax on brokers The Govt. has now revised rate of advance tax from 0.01% of purchase/sale value to 0.02% of purchase/sale value. This may have an impact on broker margins. Minimum tax on companies The Govt. has proposed to implement minimum tax of 1% on turnover on companies declaring gross losses. Currently companies declaring gross loss are exempt from payment of minimum tax. This will help reduce tax avoidance as currently individuals and Association of Persons (AOPs) are subject to this tax. 5

6 Stock Market (contd.) Conclusion: Neutral for the market Overall, we think Budget FY17 is Neutral for the market. Pakistan s entry into MSCI emerging market remains a key trigger for the market. We are Over-weight on Cement, Autos, OMCs, and Consumer sectors. Top Picks: Key Numbers PE (x) Dividend Yield PBV (x) 2016E 2017F 2018F 2016E 2017F 2018F 2016E 2017F 2018F Market % 6% 7% Market (ex-oil) % 7% 7% OGDC % 4% 5% MCB % 7% 8% UBL % 7% 8% KEL % 0% 0% LUCK % 2% 3% ENGRO % 8% 9% HUBC % 9% 10% PSO % 5% 6% DGKC % 4% 5% INDU % 13% 14% MLCF % 5% 7% NML % 4% 4% KOHC % 6% 8% PAEL % 5% 5% IGIIL % 3% 4% AICL % 9% 9% Source: Topline Research 6

7 Sector Impact Analysis Fertilizer Positive As expected the Govt. has focused on the agriculture sector in this year s budget and in this spirit has announced reduction in Urea prices. This has been done in two steps. Firstly, the Govt. has reduced GST on Urea from 17% to 5%, which results in Rs185/bag at current price of Rs1,800 per bag. Further, Federal and Provincial Govts. will be giving subsidy of Rs215/bag to reduce price of Urea to Rs1,400/bag. Total burden of this subsidy is expected at Rs36bn. The Govt. has also announced subsidy on DAP to reduce its price to Rs2,500/bag from Rs2,800/bag, which is expected to cost the Govt. Rs10bn. These are extremely positive measures and will improve Urea off take that had come off late and had resulted in piling up of inventories. We expect significant reduction in urea inventory levels, which bodes well for local urea producers. There is no change in GIDC on either Feed of Fuel tariff. There were expectation that this might be reduced. Improved farmer liquidity due to elimination of 7% GST on pesticides should help support sales of fertilizer. The Govt. has announced the following relief for the agriculture sector, which should further improve farmer liquidity and benefit local fertilizer sales: 1. Increased Agriculture Credit target to Rs700bn from Rs600bn last year. 2. The Govt. has reduced electricity tariff for tube wells from Rs8.85/unit to Rs5.35/unit, which is expected to cost Rs27bn in subsidy. 3. SBP has developed a framework to reduce mark-up rates of ZTBL, NBP, Bank of Punjab and Punjab Co-operative by 2.0% to Agriculture. 7

8 Sector Impact Analysis (contd.) Textile OMCs Positive Neutral The Govt., as expected, has given zero-rated status to Textile Sector, which should help improve liquidity of the sector. The sector is now subject to no tax and no refund policy under GST and will not have any funds stuck up as receivables from the Govt. that affects their business. The Govt. to further provide liquidity to the sector has committed to refund stuck up sales tax by Aug These measures should help improve profitability to some extent given lower working capital requirements and financial charges. The Govt. has reduced export refinance rate from 3.5% to 3.0%, which should further help reduce borrowing costs for the sector. Relief measures announced in previous year s budget including duty drawback rates on various textile products and duty free textile machinery imports have been announced in this year s budget as well. Concessionary duties on man made fibers not produced locally are proposed to be continued in this year s budget, which should be positive for local textile industry. From Pakistan State Oil (PSO), the Govt. expects to receive dividend income of Rs660mn (Rs2.2/share). While it expects to receive dividend income of Rs500mn (Rs0.8/share) and Rs1,500mn (Rs1.7/share) from Sui Northern Gas (SNGP) and Sui Southern Gas (SSGC), respectively. However we expect dividend per share of Rs15 from PSO thanks to improving cash flows while SNGP is estimated to declare Rs1.3 in FY17 while we do not expected any dividend from SSGC. Minimum turnover tax has been maintained at 0.5% on OMCs. The Govt. has set target of Rs150bn collection under petroleum development levy (PDL) in FY17, which is up 11%. This will have no impact on the sector. 8

9 Sector Impact Analysis (contd.) Cements Neutral The Govt. has proposed to change the Federal Excise Duty (FED) mechanism from variable 5% of Marginal Retail Price (MRP) to a fixed Rs1/kg (Rs50 per bag). This change will not only increase existing FED (around Rs22 on 50kg bag of Rs515), but also increase sales tax in absolute terms as sales tax is being calculated on top of FED. Consequently, cost will be increased by Rs33 per bag (Rs660 per ton). On the other hand, the Govt. has reduced import duty on coal from 6% to 5%, which will have a positive impact of Rs1/bag. We believe that the net impact of Rs32/bag will be neutral for the industry in the long run as contraction in supplydemand gap and robust demand will enable cement manufacturers to gradually pass on the impact to final consumers. The Govt. is expected to set consolidated PSDP (Public Sector Development) target of Rs1.67tn (up 11%) for FY17. With no IMF restrictions and decent fiscal space, this higher Govt. spending bodes well for the sector as this will result in increased construction activities. Further, the Govt. has allocated Rs188bn for construction of roads, highways and bridges, which is an increase of about 18% as compared to last year. In order to promote housing, the Govt. has increased maximum deductable allowance from Rs1mn to Rs2mn on payment of profit on debt for construction of a new house or acquisition of house. This would help increase housing demand and would result in improved cement sales. The Govt. has imposed final tax on builders/land developers on basis of per unit area, which is expected to generate Rs25bn in new taxes. This proposal has already been vetted by local association of builders and we do not expect this to have any meaningful impact on booming construction activities in the country. 9

10 Sector Impact Analysis (contd.) Cements (cont.) The Govt. has also increased customs duty on import of clinker from 2% to 11%, which will be positive for local industry and will discourage clinker imports. Power Telecom Neutral Neutral The Govt. plans on adding 10,000MW by Mar 2018, which will help alleviate power outages in the country. Due to lower oil prices, piling up of circular debt has reduced, which bodes well for the country s energy sector chain and particularly the power sector. The Govt. has increased rate of sales tax on mobile phones, which will result in higher prices of mobiles, which we believe will be neutral for the telecom sector. In order to promote information technology (IT) sector, income tax exemption for exporters of IT services is proposed to be extended for the next 3 years. E&Ps Neutral The Govt. expects to receive dividend of Rs35bn (Rs8/share) from Oil and Gas Development Company (OGDC). This is higher than our expectations of Rs5/sh. Further, the Govt. expects dividend from Pakistan Petroleum Limited (PPL) of Rs7bn (Rs3.4/share). This is lower than our expectation of Rs6/share. 10

11 Sector Impact Analysis (contd.) Auto Neutral The Govt. has endorsed recently announced Auto Policy in this year s budget. Previously, there were expectations that import duty on used cars may be reduced. Advance tax of 3% has been imposed on financing/leasing on vehicles to be collected by financial institutions. We do not expect this to have meaningful impact on car financing as this is an adjustable tax expense. Positive policies for agriculture sector should help boost farm incomes and is likely to result in improved auto demand from rural areas of the country. Regulatory duty of 10% on import of bead wire has been removed, which should be slightly positive for local tire manufacturers. Banks Neutral to Negative In continuation of policy announced in FY16 budget, the Govt. has extended the levy of super tax of 4% on bank s income for tax year It will have an earnings impact of around 6% in 2016 as banks will likely book additional tax burden in 2Q2016 just like in Govt. has clarified that WHT on cash withdrawal of over Rs50,000 shall be aggregates from all banks in a single day rather than separate transaction of Rs50,000 from each bank account. This rule will also apply on WHT of 0.6% for banking transactions of over Rs50,000 for non- tax filers. This could discourage cash withdrawals and deposit mobilization in the banking system. Overall impact is not significant on banking deposits. The proposal to increase WHT from 0.4% on cash withdrawals for tax filers and 0.6% on non-filers has not been accepted and there is no change in the ruling. Govt. has set a target of Rs700bn (up 17%) for Agriculture credit in FY17, which is to be financed by commercial banks. If this happen it bodes well for local banks. 11

12 Sector Impact Analysis (contd.) Banks (cont.) Consumer Neutral to Negative Govt. targets to raise Rs452bn in FY17 from total bank borrowing vs. Rs199bn in FY16. With IMF program completing in Sep 2016, Govt. may reduce its dependence on commercial bank borrowing in favor of borrowing from central bank. That may force banks to lend aggressively to private sector. Zero-rated status on milk products has been withdrawn and these have been placed in tax exempt category. Local milk producers will therefore not be able to claim refund on sales tax paid on inputs, which will have an impact of around Rs6/ltr. To recall both Nestle and Engro Foods have raised their packaged milk prices by Rs5/ltr in last few weeks. Going forward another price increase to pass on this cost to consumers cannot be ruled out. This rising prices will increase the pricing differential between packaged and loose milk. This may slightly affect sales growth of packaged milk producers, we believe. The Govt. has proposed to increase regulatory duty on powdered milk from 25% to 45%, which will primarily impact tea whiteners (Tarang by EFOOD and Everyday by NESTLE) by Rs2-4/ltr. However, given strong competition in this segment, the impact of this will partially be passed on to consumers and will affect margins in the short run. The Govt. has continued with its tradition of increasing duties on cigarettes. In this year s budget, the FED on cigarettes has been raised by 7.5%. Phillip Morris has already increased price of cigarettes by 3% few days back and we think they will pass on the impact to the consumers. The Govt. has also continued with its tradition of raising duties on aerated water as these have been increased to 11.5% from 10.5%. 12

13 Sector Impact Analysis (contd.) Insurance Negative It is proposed that all sources of income for insurance companies including dividend income and capital gains are taxed at the level of corporate tax rate which is 31% for FY17. Before this dividend and capital gain was taxed at lower rate. This will have a negative earnings impact of 5%-10% for insurance companies that rely on returns from stock market. It is proposed to impose WHT of 4% on premium of non-life insurance on non-tax filers and WHT of 1% on life insurance if the premium amount exceeds Rs0.2mn for non-tax filers. This could slightly affect growth in insurance premium. At present, tax credit is available on the payment of life insurance premium up to Rs1.5mn. A new tax 5% of tax payable or Rs100,000 whichever is less is proposed to be allowed on payment of premium of health insurance. Govt. has also announced health insurance scheme which targets to distribute insurance policy to the tune of Rs9bn by FY18. At present, Commission paid to life insurance agents is taxed at the rate of 12% for filers. The rate of tax is being reduced to 8% for tax filers on commission received up to Rs500,

14 FY17 Budget Highlights After achieving macroeconomic stabilization during last three years, Govt. has now shifted its focus towards growth as it unveiled pro Growth FY17 budget. The focus of the budget remained on revival of Agriculture sector that contributes around 21% of GDP and Textile sector that is the main driver of country s exports. Budget proposal prepared by the Govt. is based on principles including, 1) Gradual withdrawal of tax concessions, 2) penalizing non-filers to encourage tax filing, 3) broadening tax base & documentation of economy and 4) increasing the share of direct taxation. The total outlay for budget FY17 is Rs 4.9tn (14.8% of GDP), which is 10% higher than previous budget estimate of Rs4.4tn. The Govt. has total tax revenue target of Rs3.9tn (12.9% of GDP), 16% higher than the estimate for FY16. Non-tax revenues are estimated at Rs959bn (2.9% of GDP), 5% higher than the estimated amount for FY16. These additional tax revenues will be collected from new tax measures to the tune of Rs250bn and the remaining Rs286mn will likely be collected from normal GDP growth. Current Expenditures for FY17 is expected to clock in at Rs3.4tn (14.9% of GDP), which is 4% higher than the estimate of Rs3.2tn for FY16. Defense budget is estimated to increase by 11% at Rs860bn (2.6% of GDP), whereas debt servicing is likely to go up by 3% to Rs1.3tn (4.1% of GDP). 14

15 FY17 Budget Highlights (contd.) Federal Development Expenditures for FY17 is estimated at Rs800bn (2.4% of GDP), up 21%. Total consolidated development expenditures are expected to increase to Rs1,675bn (5.1% of GDP) as against Rs1,500bn during the previous budget. The Govt. is likely to contain total subsidies to Rs141bn (0.4% of GDP) in FY17 as against Rs197bn estimated for FY16, mainly due to lower power sector subsidies. The Govt. has set fiscal deficit target of 3.8% as % of GDP (Rs1,276bn) for FY17 as against 4.3% during the previous year. The Govt. is likely to finance a major proportion of deficit through external and non- bank borrowings. Net external financing is estimated at Rs234bn, whereas, nonbanking financing is estimated at Rs589bn. From banking sources the Govt. expects to receive Rs453bn. Federal Budget Snapshot and Consolidated Fiscal Deficit As % of GDP FY16 Budgeted FY16 Revised FY17 Budgeted Total Revenues 15.1% 15.9% 16.0% Tax Revenues 12.0% 12.6% 12.9% FBR Revenues 10.1% 10.5% 10.8% Total Expenditures 19.4% 20.2% 19.8% Current Expenditures 14.9% 15.9% 14.9% Debt Servicing 4.4% 4.5% 4.1% Subsidies 0.5% 0.7% 0.4% Development Expenditure 3.3% 3.0% 3.1% Consolidated Deficit 4.3% 4.3% 3.8% Source: MoF, Topline Research 15

16 FY17 Budget Highlights (contd.) New Fiscal Year Economic Targets The Govt. has set GDP target of 5.7% in FY17 and plans to increase it to 7.0% by FY19. Fiscal deficit will be reduced to 3.8% of GDP (Rs1,276bn) in FY17 as against 4.3% in FY16. In the medium term, the Govt. will target to further contain fiscal deficit to 3.5% by FY19. CPI inflation is expected to be lower than 3% in FY16 and the Govt. plans to keep it in single digit during the next three years. The Govt. targets to increase investment-to-gdp ratio to 21% from the existing 15% by In FY16, it is expected to clock in at 15.2% vs. 15.5% last year. Key Economic Indicators FY12A FY13A FY14A FY15A FY16E FY17F Real GDP growth (%) 3.8% 3.7% 4.1% 4.0% 4.7% 5.7% Inflation (%) 11.0% 7.4% 8.6% 4.6% 2.7% 6.0% Fiscal Deficit (%) 6.8% 8.2% 5.5% 5.3% 4.3% 3.8% Investment to GDP ratio (%) 15.0% 14.6% 14.9% 15.5% 15.2% 17.0% Current Account as % of GDP -2.1% -1.0% -1.3% -1.0% -0.6% 1.5% FX reserves (US$bn) Remittances (US$bn) Source: MoF, PBS, SBP 16

17 FY17 Budget Highlights (contd.) Federal Budget Snapshot and Consolidated Fiscal Deficit Rsbn FY16 Budgeted FY16 Revised FY17 Budgeted Tax Revenues 3,418 3,420 3,956 FBR Revenues 3,104 3,104 3,621 Other Taxes Non Tax Revenues Gross Revenue Receipts 4,313 4,333 4,916 Net Revenue Receipts 2,463 2,481 2,780 Current Expenditure 3,166 3,282 3,400 Debt Servicing 1,280 1,315 1,360 Defense Subsidies Development Expenditures ,051 PSDP-Federal PSDP-Total 1,514 1,394 1,675 Other Development Expenditure Total Expenditure 4,451 4,479 4,895 Fiscal Deficit 1,328 1,255 1,276 Source: MoF, Topline Research 17

18 PSDP Budget Allocation & Actual Spending Rsbn PSDP Allocation (bn) PSDP allocation percent of GDP % 5% 4% 3% 2% FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16E FY17F Rsbn 1500 Total PSDP spending Spending as % of GDP % 5% 4% 3% 2% FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A FY16E FY17F Source: MoF,, Topline Research 18

19 FY17 Budget Other Measures Tax Measures: It is proposed to extend holding period for taxation of capital gain on sale of immovable property from 2 years to 5 years to be charged at uniform 10% rate. At present, minimum tax on turnover is paid by individuals and AOPs having turnover exceeding Rs50mn. A large number of Individuals and AOPs having turnover below Rs50mn are filing returns yet they are not paying any tax. It is proposed that minimum 1% of turnover may be made payable by Individuals and AOPs having turnover exceeding Rs10mn. In order to expand the tax base, it is proposed that a withholding tax at the rate of 5% of the value of minerals be collected from non-filers. The rate of withholding tax for providing or rendering services by print and electronic media is 1%, whereas for others it ranges from 8-10% and for low margin sectors it is up to 2%. It is proposed that the withholding tax for providing or rendering services by print and electronic media to be enhanced from 1% to 1.5%. Rate of withholding tax for commercial bills of trading sector up to Rs20,000 per month is fixed with various slabs. Rate of withholding tax for commercial bills above Rs20,000 is 10%. This rate is proposed to be increased to 12%. There will be no change for industrial consumers. It is also proposed that any person making payment for a foreign produced advertisement shall collect withholding tax at the rate of 20% of the payment. Concessionary rates of Customs Duty and sales tax on major poultry feed ingredients like soybean meal and vitamin premixes shall remain intact. However, other ingredients that are subject to sales tax at the rate of 5% are proposed to be subjected to sales tax at 10%. 19

20 FY17 Budget Other Measures (contd.) Relief Measures In order to promote industrial growth and employment generation tax 1% of the tax payable for a period of ten years that is allowed for every 50 employees in an industrial undertaking to be set up by Jun 2018, is proposed to be increased to 2%. This concession will be made available for 10 years to the industrial undertakings set up by Jun At present, tax credit on BMR (Balancing Modernization and replacement) is allowable at the rate of 10% of investment against tax payable for two years. In case of investment through 100% new equity, tax credit on BMR is allowable at the rate of 20% of investment against tax payable for five years. The period is proposed to be extended to 30th Jun At present a manufacturer registered under sales tax that is making over 90% sales to registered sales tax persons is entitled to a tax credit of 2.5% of tax payable. The tax credit is proposed to be enhanced from 2.5% to 3% of tax payable. Import of solar panels and related components were exempted from customs duty regardless of local manufacturing of their substitutes till 30th June It is proposed that this relaxation be extended till 30th June, Sales tax on import of dumper trucks for Thar Coal is proposed to be abolished. In order to provide relief on education expenses which are unbearable for low income groups, it is proposed that individuals having taxable income less than Rs1mn should be given tax relief equal to 5% of school fee of up to Rs60,000/child per annum. 20

21 FY17 Budget Other Measures (contd.) At present a tax credit is available for contribution in an approved Pension Fund with a maximum of 20% taxable income. An additional contribution of 2% for persons above 41 years of age to a maximum of 50% of taxable income is available up to Jun 6, It is proposed that the period may be extended up to Jun 6, 2019 with condition that the maximum tax credit be restricted to 30% of taxable income of the preceding year. Large Trading Houses were exempted from payment of minimum tax at the rate of 1% during the first 10 years of commencement of business operations. This exemption shall expire in Jun In order to incentivize this organized section of the retail sector and to attract foreign investment, this exemption is proposed to be gradually withdrawn and minimum tax is proposed to be reduced to 0.5% of the entire turnover up to Tax Year

22 Contact us Mr. Mohammed Sohail CEO Dir: +92 (21) Cell: Research Team: Mr. Saad Hashemy Chief Economist & Director Research +92 (21) Mr. Muhammad Tahir Saeed Deputy Head of Research +92 (21) Mr. Umair Naseer Senior Research Analyst +92 (21) Mr. Nabeel Khursheed Senior Research Analyst +92 (21) Mr. Hamza Raza Research Analyst +92 (21) Mr. Fahad Qasim Manager Research +92 (21) Mr. Uzair Ahmed Research Officer +92 (21) Mr. Asif Habib Assistant Database +92 (21) Equity Sales Team: Mr. Muhammad Rizwan Head of Sales Dir: +92 (21) Ms. Samar Iqbal VP Equity Sales Dir: +92 (21) Mr. Hammad Aman Manager Equity Sales Corporate Office: 508, Continental Trade Center, Block-8, Clifton, Karachi, Pakistan Tel: Fax: