IGI Securities Limited – Budget

Karachi, June 12, 2019 (PPI-OT): Budget 2019-20 – Heavy fiscal overhauling to outweigh short term growth

The newly formed government Pakistan Tehreek-e-Insaf (PTI) presented its first full budget for the year FY20. The budget speech was given by Finance Secretary Hammad Azhar, starting his discourse by evaluating outgoing government fiscal management performance citing total budget deficit for FY19 at 7.1% of the GDP or PKR ~2.7trn, which is roughly 45% over and above initially budgeted amount of PKR ~1.8trn or 4.9% of the GDP size.

Through a set new budgetary amendments government hopes to bag in an additional PKR ~1.4trn in tax revenues to PKR ~5.5trn a +34% growth over FY19 revised tax numbers. The government missed on its FY19 fiscal deficit target by a good PKR 880bn or 2.3% of the GDP to 7.2%. Major slippages came from higher than budgeted debt servicing cost and low tax collection (off by nearly PKR 500bn). To make up for the losses, government slashed overall development budget by PKR 330bn.

Starting from key macro-economic assumptions, GDP growth is all set to average above 3% and inflation target is set at 6.0% till 2022. On fiscal side, government has targets to consolidate deficit in years ahead whereby 2021 and 2022 fiscal deficit is projected at 5.1% and 3.6% of the GDP, respectively.

Budgetary measures to address previous government fiscal shortcomings

Upcoming year budget 2019-20, is no short of ambitions either. For a starting point, government now aims to narrow down country’s fiscal deficit to 7.1% of the GDP or at PKR 3.1trn.

Revenue target for 2019-20 (PKR 3.1trn) +~35% higher than 2018-19, which is set to generate 60% from indirect taxes comprising of +41% increase in sales tax. Given how revenue collection has fared in the past couple of years, actual revenues for 2019-20 are likely to reach about ~90% of the budgeted targets. This would mean that the 2019-20 fiscal deficit target of PKR 3.15trn is in fact already ~11% off the mark.

Federal revenue collection targeted to increase by +33%, bulk of which or 60% will come from indirect taxes

Income tax target increased by PKR 421bn, contributed by increase in corporate tax rate, changes in salaried class tax slabs and WHT on property.

Withdrawal of zero rated regime for export oriented sectors. Sales tax on sugar and textile increased to 17% from 8% and 5% respectively

PKR 13bn increase in PDL and PKR 5bn increase in GIDC

Gross revenues are budgeted to show +33% growth. In 2019 lower sales tax and FED collection impacted budgeted estimates.

This requires a cut in overall expenditures. For that matter, development budget has kept tight in order to make way for rising debt servicing and defense cost, both of which are expected to take up more than the total revenues in FY20. Moreover, in 2018-19 actual PSDP disbursement was roughly 73% of budgeted amount. Unless investment growth accelerates, which in case of reduce development budget seems hard to come by, we see attaining 2019-20 GDP growth estimates will be rather challenging.

Current expenditure is targeted to grow by +30%. Last year government overshot its target by +11%.

Government missed its debt servicing cost by ~23%, In 2019-20 domestic debt servicing is budgeted to increase by PKR 904mn on the back of rising interest rates

Defense cost is budgeted to remain relatively same

PKR 251bn subsidy to be allocated for WAPDA and KEL

New Budget echoes government’s continuing efforts to broaden tax net

FY20 budgetary measures echo’s government efforts to broaden tax net and simultaneously protect the underprivileged segment of the country. Moreover, with ~50% of the tax revenue employed for debt servicing, the budget tried to strike a balance between keeping a healthy development target and reduction in fiscal deficit. For that matter the government has put up an ambitious primary fiscal deficit target of 0.6% in FY20 down from 2.0% of the GDP in 2019.

Among key tax measures include;

1# Taxation of Capital gains on immoveable properties

Capital gain tax on immoveable property is now brought under normal tax regime where previously the rate was 10% for holding period of less than 1 year, 7.5% for holding period between 1 to 2 years and 5% for holding period between 2 to 3 years. Gain on open plots for holding period of up to 1 year will be taxed on the full amount while for period between 1 to 10 years, 75% of the gain will be subject to tax. Similarly, for gain on constructed property for period up to 1 year will be taxed on full amount whereas for holding period between 1 to 5 years 75% of the total gain will be taxed. However, there will be no tax on the amount of gain made where holding period is greater than 5 years.

2# Taxation of the Real Estate Sector

Various measure has been taken to restructure the taxation on real estate sector as it has been a source of money laundering and safe haven for untaxed money. The measures taken include:

I. The FBR rates of immoveable properties in 21 major cities are intended to be brought closer to or about 85% of the actual market value and 3% tax between difference of DC value and FBR value for not explaining source of investment is withdrawn.

II. Rate of WHT tax on immoveable property is being reduced to 1% from 2% currently.

III. The threshold of WHT tax on purchase of property to the tune of PKR 4mn or above is being abolished and will be collected irrespective of the value of the property purchased.

IV. WHT tax on sale of property will only be collected if the holding period is less than 5 years compared to no tax currently if property is held for more than 3 years as capital gain tax is brought under normal tax regime even beyond 3 years holding period.

V. The restriction for non-filer to purchase immovable property of PKR 5mn or above is now abolished.

3# Hundred percent higher tax rate for persons not appearing in active taxpayers list

The tax rates applicable for persons who do not appear in active taxpayers list would be increased by 100% of the tax rates collected or deducted under final tax for persons falling under active taxpayers list. However, the excess tax collected under the Tenth Schedule for persons not appearing in the active taxpayers list will be adjustable if the adjustment is filed before finalization of assessment prior to expiration of 45 days’ period after the date of provisional assessment (which is within 60 days of due date or as extended by the Board) according to rule stated under Tenth Schedule.

Market likely to suffer on back of weak corporate earnings outlook

As it is with any austere budget, corporate earnings are likely to suffer. The government has proposed increased corporate tax rates, continuation of super tax along with amendments in depreciation adjustments and carry forward losses, turnover tax rates, abolishment of zero-rated regime on five export oriented sector and increased FED on LNG. While we expect negative bearing for the market we may see liquidity diversion towards equity market from real estate and debt instruments.

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