Biting the hand that feeds you: Exporters to pay 35% tax on net income

[Naveed Yaseen]

* Budget is non-event for banks, IPPs, E&Ps and gas marketing sectors

KARACHI: According to the budget documents, exports are no longer in the final tax regime that is exporters' profits will now be assessed for tax purposes and they will be paying tax at the rate of 35 percent on their net profit, said Mohammad Sohail of Topline Securities.

In order to boost exports a presumptive tax regime was conceived in 1992 whereby exporters were provided tax facilitation and they were generally paying 1 percent of export proceeds as full and final tax, he said.

Now according to the new Finance Bill this 1 percent tax will be treated as minimum tax and would not be full and final. This will be a big blow to all the exporters who are already suffering from weak global environment, local security situation and high cost of borrowing.

“According to our initial assessment key listed exporting companies like Nishat Mills and Lucky Cement would suffer, as they now need to pay higher taxes, unless they have tax shield available,” said Sohail.

He said we see some pressure in the stocks of such export related companies.

According to JS Research, the first budget since the country entered into the International Monetary Fund (IMF) programme is impressive on two accounts, one serious effort to enhance tax base and documentation, and two rationalisation of subsidies.

It said that this would have a multipronged impact on the overall tax collection and budget deficit. As expected, the government has barred imposition of Capital Gain Tax (CGT) on stock investments, however, opted to impose service charges at 16 percent on brokerage services, inline with its tax broadening theme.

Additionally, government's decision to keep the existing tax rate and some relief awarded to autos and cements is likely to carry positive sentiments for overall the Karachi stock Exchange 100-share index.

The key to achieve fiscal year 2010 macro targets hinges with fiscal balance. The interesting feature for the next budget is 4.9 percent budget deficit, 9.6 percent tax revenue target and 65 percent of budgetary financing through external sources.

The JS report said that the substitution of carbon tax into tax revenues would contribute approximately 0.8 percent to the gross domestic product (GDP). Hence, the tax target adjusted with carbon tax stands at 19 percent yearly, which does not seem an impossible task, given substantial increase in withholding tax (WHT) on imports, imposition of federal excise duty (FED) on services sector and real estate.

According to the First Capital Research, the FY10 budget has been chalked out on a theme to stimulate the flattering domestic economy while remaining within the confines of the IMF programme conditionalities. While measures like higher allocation to flagship programmes, focus on social sector and rise in expenditure are aimed to stimulate the flattering domestic economy, to its credit, the government has tried to restrict the non-productive expenditure by substantially lowering the subsidies on oil and electricity tariffs.

The incremental fiscal space in the milieu of pledges made by Friends of Pakistan (FoP) and other multilateral agencies, has allowed the government to jack-up its development expenditure, which had to be curtailed in FY09 due to resource constraints. On the receipt side, the economic mangers are aiming for higher revenue targets and slippage on this front would be a key risk to the government's development expenditure target. The government has budgeted Rs 134 billion under this new head for FY10.

The First Capital report said that the budget forecasts a real GDP growth of around 3.3 percent, adjusted for inflation, this places nominal growth next year at around 13 percent. The economic mangers foresee a slowdown in agricultural growth (from 4.7 percent to 3.8 percent) on the assumption that bumper crop witnessed in FY09 might not be achieved in FY10 given its cyclical nature. On the other hand, the government is mainly banking on the revival in industrial growth (from -.3 percent in FY09 to 1.8 percent in FY10) to pull overall growth. Besides, slight improvement in services sector is also pursued by the government.

In a surprising move, the Finance Bill 2009 seeks to exempt purchase of shares of public company listed on the stock exchange from 0.02 percent Capital Value Tax (CVT). On standalone basis, the step to abolish CVT is a bit crucially positive for the market. However, the simultaneous levy of FED on brokers would be ultimately passed on to the clients. Thus, the net impact of these two measures would be neutral. Our prime picks for budget are cement, auto, telecom and fertilizer sectors on the back of higher infrastructure spending, favourable tariff rebalancing and increased agri focus. However, the budget was a non-event for banks, IPPs, E&Ps and gas marketing sectors.

According to Invest Capital, in the budget FY10, the government has tried to address the prevailing economic slowdown through improving productivity of the real sector (agriculture and industrial).

The FY10 budget can easily be termed as a pro-growth budget with its vital allocation for development expenditures and spending proposed for the betterment of low-income stratum through Benazir Income Support Fund (BISF). War on terror requires consistent defense spending whereas IDPs problems accrue additional resources. Therefore, continuity in defense expenditure seems imminent in the short run. However, availability of external resources would be an integral part of the funding. Whereas it would result in further accumulation of debt servicing for the coming periods. The focus of the FY10 budget is rightly on agricultural, manufacturing, SMEs, and investment in order to successfully maintain the target of long-term broad-based growth of the economy. Although tax structure remains the focal point, it still requires more in terms of broadening tax net. Imposition of VAT regime on services and enhancing rate for real estate can be termed as the beginning for the rationalisation of tax structure. staff report

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