Budget Deviation Raises Concerns for Pakistan Stock Exchange
Stock Exchange Bearish: Pakistan’s Stock Exchange (PSX) anticipates a downturn in the wake of the unveiling of the ‘neutral to negative’ federal budget for fiscal year 2024. Analysts express concerns over the potential selling pressure on the PSX in the event of a government-IMF split, although the likelihood of such an outcome is low.
Tax Measures Impacting Stock Market Sentiment
Finance Minister Ishaq Dar presented a series of tax measures during the budget announcement in the national assembly on Friday. These measures, perceived as detrimental to the stock market, include a 10% tax on bonus shares, reintroduction of a 0.6% tax on cash withdrawals for non-filers, and a retrospective increase in the super tax rate by six percentage points to 10%.
Potential Selling Pressure and Neutral to Negative Outlook
Traders and investors had already factored in some of these measures into their expectations. However, the introduction of a tax on bonus shares is expected to discourage companies from issuing them, potentially leading to selling pressure from investors. Market analysts suggest a prevailing neutral to negative sentiment in the coming days.
Temporary Surge Amidst Lingering Market Concerns
Despite the budget announcement, the PSX experienced a temporary surge, with a 0.52% increase on Friday, reaching 41,940 points. However, this upward movement is deemed transitory due to the ongoing selling pressure in the market. Investors had already purchased shares in anticipation of bonus shares and dividends, limiting the scope for extensive selling.
Limited Buying Activity and Monetary Policy Impact
Market analysts do not foresee a surge in buying activity as a response to the budget. Additionally, the State Bank of Pakistan (SBP) is scheduled to announce its monetary policy on Monday, with expectations leaning towards a maintenance of the record high key policy rate at 21%. This announcement is also anticipated to exert a neutral to negative impact on the market.
Analysis of Budget Impact on PSX
Topline Research analyzed the budget’s repercussions on the PSX, highlighting significant factors. The reintroduction of a 10% final withholding tax on bonus shares is expected to dissuade companies from issuing them, potentially affecting market trade volume. Conversely, the reduction of minimum tax liability on turnover from 1.25% to 1.0% is perceived as beneficial, particularly for listed firms facing losses or operating on narrow margins.
Implications of Super Tax and Income Slabs
The decision to increase the super tax on companies from 4% to 10%, along with the introduction of three new income slabs for incomes above Rs150 million, is regarded as a neutral event for the market. Surprisingly, the government did not impose taxes on reserves or retained earnings, which is expected to have a neutral impact.
Additional Tax on Unexpected Income and Incentives for Pharmaceuticals
However, the provision for imposing up to a 50% additional tax on unexpected income for the preceding five tax years poses a negative aspect for the market. On a positive note, the inclusion of one more Active Pharmaceutical Ingredient (API) and three drugs in the existing duty-free regime provides an incentive for the pharmaceutical sector.
Positive Moves in IT Sector and Real Estate Investment
Furthermore, the continuation of the concessionary fixed tax rate of 0.25% for IT and IT-enabled services exports until the tax years 2026 is considered a positive move. Additionally, the extension of the exemption for one year on profits and gains from the sale of immovable property or shares of special purpose vehicles to any type of Real Estate Investment Trust (REIT) scheme until June 30, 2024, is regarded as a positive development.
Negative Impact of Withholding Tax on Cash Withdrawals
Conversely, the re-imposition of a 0.6% advance adjustable withholding tax on cash withdrawals for non-Active Taxpayer List (ATL) individuals is perceived negatively by the market.
Challenges Ahead and Investor Monitoring
The Pakistan Stock Exchange (PSX) faces a challenging period ahead due to the combined impact of the budget’s tax measures and the upcoming monetary policy announcement. Investors remain vigilant, closely monitoring market dynamics and evaluating the implications of these decisions on their investment strategies in the coming weeks.
Published in PakWeb, June 9th, 2023.
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