Pakistan Budget: PML-N fails in making a difference

I am placing some excerpts from the editorial published in Pakistan’s leading English daily newspaper and also a commentary by country’s leading brokerage house,  Dawn has termed the budget speech of finance minister as one most lethargic one the country has seen in many years. Not only the mood within parliament, but the budget proposals themselves evoked little more than weary nods.

But the apathy showed mostly in the proposals to lift revenues and rejuvenate collapsing sectors. The budget sees growing recourse to withholding taxes, turnover taxes and transaction taxes, whereas income and consumption are dropping off the taxman’s radar. These are not only regressive measures, signaling defeat in the larger struggle by PML-N government has seen as its own to broaden the tax net.

While going through details of the new tax measures may show where the incremental revenue will come from, the budget speech left little doubt that the incumbent government has comprehensively run out of ideas on tax reforms, and broadening the tax base has been lost as a priority.

PML-N began its term with tall promises to reform the power sector, broaden tax base, widen tax net and contain losses of public-sector enterprises. All that proved to be bombast, and in the closing years of its rule, the party presents a haggard look.

The government faces a daunting challenge to address the collapse in exports and agriculture, but government came up with nothing more than more price inducements in the form of reduction in fertilizer prices or incentives in the form of zero rating of sales tax on textile exports.

One can only hope that these measures help will lift these vital sectors from the doldrums, but doubts hang heavy. The contradiction is that the revenue measures the government has resorted weigh on growth by squeezing existing taxpayers more, so whatever energy the price inducements can inject into these moribund sectors might be negated with the deleterious effects of the measures.

AKD Securities report says that the he fourth PML-N budget retains its resolve of macroeconomic stability and growth tilt by stimulating laggard sectors like Agriculture and Textile, while also promoting a documented tax base. Picking up from last year, brokerage house is encouraged by the 21% higher Federal PSDP allocation, which provides an increasing pivot towards infrastructure activities.

FY17 GDP growth target of 5.7% seems ambitious due to FY16 likely to post 4.7%. While stock market related taxation regime has been immaterially tweaked, corporate related tax measures like: 1) higher incidence of taxation on Insurance sector, 2) extension of the super tax regime for another year with a new provision which proposes to exclude Brought forward depreciation and business losses and 3) removal of tax exemption on inter-corporate dividends for companies availing group taxation relief can together materially impact business sentiments.

The budgetary implications on the market should be neutral to negative where all eyes should now be focused towards the upcoming MSCI-EM reclassification announcement on 14th of this month.

Economic targets for FY17 seem ambitious but challenging. The fiscal deficit target of 3.8% necessitates aggressive tax collection efforts. With external repayments starting next year, reliance on domestic sources for funding the deficit is likely to further exacerbate. However, on-going fiscal consolidation efforts can consequently give rise to concerns regarding necessary allocation for CPEC projects planned for completion by FY18.

Proposed reduction in urea prices by Rs390/bag is a key positive enabling the manufacturers to clear sizable inventory stockpiles. Textiles should also benefit where recent budgetary measures, in addition to availability of gas and exemption from load-shedding are likely to improve the operating environment. With budgetary implications on the market expected to be neutral to negative in nature, investors are advised to realign portfolios towards Cements, Fertilizers, Textiles and Power sectors.


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