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Budget 2020-21 and sectoral impact

The Federal Budget FY21 has an estimated outlay of Rs7,295 billion, 11% lower as compared to last year’s budgeted outlay of Rs8,238 billion. The budget has been slated as a relief budget by the government, where the attempt has been to cushion the economic loss arising because of the COVID-19 outbreak. However, no major announcements in this regard have been made as such.

Topline Securities, one of the leading brokerage houses of Pakistan believes that under the extremely tough economic conditions due to the COVID-19 outbreak, the government will have a huge juggling task to contain the fiscal deficit. International Monetary Fund (IMF) will continue to act as a watchdog on Pakistan, to keep Pakistan on track under the Extended Fund Facility.

The brokerage house believes the government has set highly ambitious FBR targets for the upcoming year given the prevailing economic conditions. The government has also not imposed any new taxes in the budget either to increase collection. It expect a mini-budget in the later part of the year, especially as Pakistan is expected to come under increased scrutiny of the IMF from October 2020 onwards.

The government has tried to limit both the Current and Development expenditures in the budget, where it is worth mentioning that the government has not increased salaries and pensions of government employees. The government has set a total Development Expenditure target of Rs1,324 billion, which is 18% lower as compared to last year’s budget.

From equity market’s vantage point, the brokerage house terms the budget largely ‘Neutral’. However, investors may feel some disappointment as the government largely ignored stock-market related proposals including reduction in Capital Gains Tax (CGT) amongst others. The market may remain concerned over containment of fiscal deficit in the upcoming year, where a mini-budget in the later part of the year cannot be ruled out.

According to the brokerage house, Cement, Steel, Consumers and Pharmaceuticals sectors are likely to be key beneficiaries of this budget, whereas it is expected to be largely Neutral for the other sectors. The government has maintained existing rate of CGT on disposal of securities. The relevant amendment has been made to extend CGT beyond tax year 2020. No Change in Corporate tax rate, it is worth mentioning that last year government fixed corporate tax rate at 29% for next two years. In line with that, this year no change was proposed in corporate tax rate, which is in line with market expectations.

 

Tax credit on new enlistments extended till June 2022 can be termed positive. Currently a tax credit equal to 20% of the tax payable shall be allowed for the tax year in which the said company is enlisted and for the following three years. This offer is extended till 30th June 2022. Minimum turnover tax unchanged – Neutral except for hotel industry, the government has not changed minimum tax regime for any sector. For hotel industry it is proposed to reduce tax from 1.5% to 0.5%. No change in tax on dividend income. Taxes on dividend income remained unchanged at 15%, while taxes on dividends from companies, which are exempted from income tax or have availed tax credits will be taxed at 25%.

Sales tax maintained at 17%, in line with market expectations, government has maintained sales tax at 17%. Tax rate on Immovable Property reduced, which is positive for real estate. The government has proposed reduction in Holding Period and Tax Rates for Capital Gain on Immoveable Property. The holding period was earlier kept at 8 years, which is now reduced to 4 years. This was also proposed in construction sector package by the government, which is now included as part of the finance bill.

Key Highlights

Total Current Expenditures are estimated at Rs6,345 billion.

Interest Expense has been budgeted at Rs2,946 billion, primarily on the back of higher bank borrowing target of Rs917 billion as compared to last year’s target of Rs339 billion).

Total Development Expenditures (Federal plus Provinces) target has been set at Rs1,324 billion, 18% lower as compared to last year’s budget of Rs1,613 billion and around 10% higher compared to this year’s utilization.

Federal Public Sector Development Program (PSDP) has been budgeted at Rs650 billion. With an escalating fiscal deficit under the IMF program, cuts in Development Expenditures can’t be ruled out.

Defense Expenditure has been set at Rs1,289 billion.

GDP growth target estimated at 2.1%. Agriculture growth target fixed at 2.8%, Industries at 0.1% and Services at 2.6%.

Inflation target has been set at 6.5% for FY21.

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