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Pakistan: Fiscal Year 2011 Budget Would Be Tax-Laden, Tougher Than Fiscal Year 2010
Source Date: Wednesday, May 19, 2010
Focus: Internet Governance
Country: Pakistan
Created: May 24, 2010

The next budget for FY11 with expected outlay of Rs 2.5 trillion would be a tax-laden and tougher than last year, as the government has no other option but to take more bitter pills to meet the IMF criteria especially relating to containing fiscal deficit, a leading analyst said. The broadening tax base, introduction of Value Added Tax, elimination of subsidies, controlling expenditure and related fiscal disciplinary measures would be the main theme of the FY11 budget, he added. The overall objective would be to stabilise economy rather than giving huge investment incentives and subsidies, Muhammad Sohail, a leading analyst and CEO of Topline Securities in his research report "Pre-Budget 2010-11" said. He said the government is projecting tax collection target of Rs 1.7 trillion for FY11, 10.6 percent of GDP. However, he is expecting that overall tax collection would be around Rs 1.5-1.6 trillion despite new taxation measures. For FY10, the government has set non-tax revenue of Rs 514 billion. "We believe the final figures would be slightly on the lower side," he said, adding that this could be due to lower the dividends realised in FY10 amid circular debt situation. He said the VAT on goods and services at 15 percent would be imposed on businesses having annual turnover of more than Rs 7.5 million. Basic food items, charities, public sector education and health would be exempted from VAT. In order to maintain fiscal deficit, the government is likely to set federal development expenditure of Rs 300-400 billion for FY11. "We expect the government would be able to contain the budget deficit at below 5 percent in FY11 by continuation of austerity measures, abolition of subsidies and lower PSDP allocation," he added.

About expected measures at stock market, he said exemption on capital gain tax (CGT) on sales of shares of listed companies will expire in June 2010. He expects the government, as per the understanding reached with the exchanges in February 2010, will impose a 10 percent capital gain tax from FY11 if shares are sold within 6 months. And at the rate of 7.5 percent if the holding period is more than 6 months and less than 12 months. There would be no capital gain tax if the holding period is more than 12 months and is likely to be imposed on local as well as foreign investors. A 16 percent FED in VAT mode on stockbroker's commission is likely to be reduced to a standardised VAT of 15 percent. Withholding tax of 0.01 percent on sale value of shares is likely to be maintained. The withholding tax of 0.01 percent on sale and purchase value in lieu of commission to be charged from brokers is likely to be maintained. A 10 percent tax on dividend on companies and individuals is likely to be maintained. The tax-starved government would likely to maintain corporate tax at 35 percent for both public and private companies. He said CGT would be the major factor market players would be looking for. The good thing for the stock market players of Pakistan, he said, is that the announcement regarding imposition of CGT, after remaining exempted for more than 30 years, has been made much earlier in February 2010 and will not create much panic now. This tax will not be deducted at source such as turnover tax but this step may reduce the activity of 'Benami accounts' amid fear that the tax authorities besides deducting tax on gains may ask for the source of funds.

Although the source of income may not be an issue for local institutions and foreigners, it can be a cause of concern for individual investors who contribute more than 50 percent to volumes, he said, adding that "thus the market activity may further shrink at a time where monthly volumes are at Rs 3.7 billion ($44 million) a day in May 2010 from a peak of Rs 24-36 billion ($400-600 million) in 2005-2007. The turnover taxes on stock investors would remain the same and will have no impact. A one percent reduction in broker's commission will be passed on to the clients. Similarly with no change likely in the corporate tax rate, listed firms earnings may not change much unless there are sectors specific budgetary measures. He believes that the tax-laden budget FY11 will have neutral to negative implications for the stock market. He said with foreign flows slowing down, the index that has rallied 9 percent in 2010 to date may remain under pressure in the short run. "We reiterate our index target of 11,500 for this year," he added. He was of the view that the government-opposition relationship has improved after the constitutional amendment. This coupled with foreign inflows were main market drivers. Coupled with this another key catalyst is the improving security situation as number of suicide attacks in 2010 to date has reduced by 15-20 percent. "Going forward, the NRO issue, power shortage, resolution of circular debt and disbursement under Kerry Lugar package will be the key driving force for the market," he said.
From http://www.brecorder.com/ 05/19/2010
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