Pakistan Budget FY19: Initial Impressions

PML-N government unveiled its 6th budget on Friday, 27th May 2018 day with a total outlay of Rs5.9 trillion for FY19 (+11% YoY over revised FY18 estimate of Rs5.3 trillion). The Finance Minister stated that despite few months remaining, the government has presented full year budget to ensure continuity of business activities in the country. He said that the newly elected government will have all the ability to make changes to measures announced. The FY19 Federal Budget seems highly populist with a series of relief measures.

The Government announced the tax relief for salaried class in-line with the recently announced tax relief package. The Government also announced that corporate tax rate to be gradually reduced by 1% to 25% (from 30%) during the next 5 years, which would result in reduced corporate tax rate of 29% for FY19 from 30%.

The Government also reiterated its stance on Amnesty Scheme as asset can be regularized till 30th June 2018. State is also given the power to purchase land and property at 100% of the declared value within six-months of its registration.

Other key highlights of the budget include: 1) super tax to be reduced by 1% every year (currently it is 3% for non-banking companies and 4% for banks), 2) removal of tax on bonus shares and 3) reduction of GST on Urea fertilizer among others.

Though measures announced by the ruling Government seem positive for the stock market, we believe that these measures could potentially be revisited by new government after the general election. Moreover, we expect Pakistan to get into another IMF program in 2HCY18, which is usually followed by shrinkage in fiscal balance.

The Government has announced removal of tax on bonus shares issue, which is now currently at 5% of market value. Ever since the imposition of this tax in FY15 budget, there has been a major decline in announcement of bonus shares by listed firms.

The Government has proposed to reduce the corporate tax rate to 25% (from current 30%) during the next 5 years. For FY19, corporate tax rate would be reduced by 1% to 29%, which would result in marginal earnings growth of 1% for listed companies.

Super tax to be reduced by 1% every year (currently it is 3% for non-banking companies and 4% for banks) and to be phased out in the next 3 years for non-banking companies and 4 years for banks.

Real Estate Investment Trusts (REITs) have been provided tax relief as REIT dividends will be subject to tax of 7.5% as compared to previous 12.5%.

Advance Withholding Tax (WHT) collected from stock brokers at 0.02% has been made adjustable. This WHT was previously a final tax liability, which led to higher taxes for brokers.

Minimum dividend payout has been proposed to be reduced to 20% from 40% and penalty has been proposed to be reduced to 5% of profits from previous 7.5%. Currently, a company (other than Banks, IPPs, state owned enterprises) has to pay 40% of its profits as dividends. If it does not distribute dividend, the company is subject to 7.5% tax on its profits.

The much expected relief for Capital Gains Tax (CGT) was not announced where it continues to be flat 15% regardless of holding period for filers while for non-filers, the tax rate is 20%. Tax on dividend income has been maintained at 15% for filers while for non-filers this remains at 18%. Minimum turnover tax has also been maintained at 1.25%. Further, tax on inter-corporate dividend has also been maintained.

GDP growth target has been set at 6.2% for FY19 as compared to 5.8% (13-year high) for FY18. This will be achieved through growth of 3.8% in Agriculture, 7.8% in Industry and 6.0% in services; these were 3.8%, 5.8% and 6.4% respectively for FY18. This is contrary to our expectations as we expect GDP growth to slow down to less than 5% during the next few years due to ongoing economic challenges.

Total budget outlay for FY19 is estimated at Rs5.9 trillion (11% higher as compared to last year’s budget outlay of Rs5.3 trillion), which seems optimistic in the light of current macroeconomic situation.

The Government has proposed Federal Public Sector Development Program (PSDP) of Rs1.00 trillion for FY19, as compared to revised PSDP of Rs750 billion for FY18 (as against initial target of Rs1.00 trillion). Out of the total Federal PSDP of Rs1.00 trillion, Rs230bn would be self-financing by the corporation/authorities and Rs800 billion would be provided through budget FY19.

The Government has targeted budget deficit of 4.9% for FY19 as compared to 5.5% expected for the current fiscal year. This is in line with our estimate of 5% and can only be achieved by announcement of further tax revenue measures post budget and containment of expenses.

In line with Tax Reform Package announced by PML-N Government in Apr 2018, it has announced significant relief for the salaried class. The Government has proposed maximum tax rate of 15% for annual income in excess of Rs4.8 million. Previously, maximum tax rate was up to 30%. However, this measure is expected to have negative impact on revenues of Rs90-100 billion (2% of total revenue).

Total Government revenue is projected at Rs5.7 trillion, which is up 13% over last year’s amount of Rs4.9 trillion. FBR Revenue for FY19 is anticipated at Rs4.4 trillion, which will be 12.8% higher than Rs3.9 trillion expected for FY18. We believe that the Government will potentially struggle to achieve this target.


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