In the last few weeks, the government has significantly reduced fuel subsidies, while passing legislation to reform state-owned entities and set up an Export-Import Bank to take over the SBP’s refinance facilities. Efforts to recapitalize two private sector banks have also accelerated. These measures are part of the structural benchmarks agreed upon with the IMF in February. The FY23 Budget is part of the same chain.
Some aspects will be challenging, for instance meeting the large target for petroleum levy will likely be politically difficult, but it is heartening to note the finance minister stated in his speech that the government is not afraid of taking tough decisions. There are also risks to headline macroeconomic targets but in its broad brushstrokes, the FY23 budget is a responsible one and should satisfy the IMF. This should help successfully complete the pending 7th review of the IMF program.
Banks – Negative
Tax rates on Banks have been increased from 39% to 42% from tax year 2023 onwards (CY2022). Super tax has been abolished and it has been replaced by Poverty Alleviation tax of 2%. Tax rates on income from government securities for banks having gross ADR of above 50% will be taxed at 42%.Tax rates on income on government securities for banks having gross ADR of less than 40% will be taxed at 55%. Tax rates on income on government securities for banks having gross ADR of between 40-50% will be taxed at 49%. Enhanced rates on government securities income will be applicable from tax year 2022 onwards. Analysts believe that this will result in sharp increase in effective tax rate and will impact profitability by 15% depending upon banks ADR. Analysts estimated earnings growth for banks of 30% for 2022 which will be impacted.
Fertilizers – Neutral to Positive
The government has increased GST on all fertilizers from 2% to 10% which will increase Urea and DAP prices by Rs142/bag and Rs820/bag, respectively. The increase in prices will easily be passed on to consumers, in our view. Analysts believe this will be positive for sector as it will result in lower piling up of sales tax receivables as they are paying 5-17% sales tax on input/raw material.
The government has increased GST on feed gas used for fertilizer from 5% to 10%. Analysts consider this will be cash flow positive for sector as it will result in no piling up of sales tax receivables from this segment.
Government has increased GST from 5% to 10% on import of Phosphoric Acid (raw material for DAP). This will be negative for local DAP manufacturers, FFBL will not be able to pass impact on final consumers as they have to keep price in line with imported DAP.
Government has estimated Rs200bn of revenue collection on account of GIDC. Analysts believe, this would be neutral for sector as the case is still pending in Court. Subsidy to LNG sector for providing gas on lower rates to industry is maintained at Rs15 billion for FY23. This will be neutral for LNG plants which includes FatimaFert and Agritech as higher Urea demand will cover up for the production coming from these both plant.
Allocation of Rs6 billion subsidy for import of Urea Government has set aside Rs6 billion for the import of Urea. This will be neutral for sector considering high demand compared to local production in the country.
Government has exempted GST on seed business; hence positive for sector.
Autos – Negative; Tractors – Positive
The government has increased advance tax on purchase of vehicle above 1,600cc. This measure will result in increase in car price for INDU, HCAR, KIA and Hyundai and will affect demand. However, PSMC is the only listed player operating in the small car segment, will have no impact car sales as all variant are below 1,600cc.
Withdrawal of 12.5% sales tax on import of CBU EV’s Electric vehicles CBU imports will be now exempted from sales tax. This will be neutral for locally manufactures.
The Government has removed 5% GST on Tractors which will improve the volumetric growth. We consider this move will be cash flow positive for sector.
The Government has imposed 2% CVT on imported vehicle on value above Rs5 million. This will have slightly positive impact on sales of HCAR, INDU, KIA and Hyundai.
Textiles – Neutral to Positive
Reduction in custom duties (CD) and additional custom duties (ACD) on 10 tariff lines relating to direct and reactive dyes will be positive for the textile sector as elimination of duties on raw material results in low raw material costs and hence margins will improve.
Federal Bureau of Revenue (FBR) to release Drawback of Local Tax and Levies (DLTL) claims of Rs40 billion immediately coupled with the sales tax on pending refunds are likely to bring improvement in liquidity position which will eventually led to decline in short term borrowing is positive for the textile sector.
Tariff structure has been rationalized on the import of Synthetic filament yarn, monofilament and staple fibers of polypropylene
Government is constantly trying hard to bring multiple solutions for shortage of cotton as Pakistan is producing only half of its entire requirement. Hence, low tariff on value chain brings some efficiency and create positive impact for the textile sector.
Government has not restored the Zero rating of the textile sector as proposed by APTMA. Analysts expect this decision to be on Neutral for the sector as government has already announced release DLTL and Sales tax refunds immediately.