budget report fy'13-14

7/28/2019 Budget Report FY'13-14

http://slidepdf.com/reader/full/budget-report-fy13-14 1/24

AHC

Budget 2013‐14: Balancing economic growth with maceconomic stability

Pakistan’s economy is in trouble; it is currently facing the challenge of a twin defic

‘complicated’ energy crisis with far reaching social and societal implications; and s

economic growth, which is pushing unemployment levels to new highs.

We dismiss the 6.3% fiscal deficit target for FY14, on grounds mentioned in this report

question how such a huge deficit will be financed particularly when debt retirement to

reaches alarming levels during FY2014;

We view raise in GST to 17pc, along‐with pledges of documentation, with caution ‐‐‐ we

also not fascinated with the idea of settling outstanding stock of circular debt in 60 days

appreciate that the same is bound to result in higher domestic debt and hence borrow

costs!

We also do not see any major changes in the taxation system and foresee Pakistan ente

into a new IMF program during FY2014.

Meanwhile, with the govt. set to finance much of the deficit from domestic sources,

foresee the following two scenarios: (a) Eventually, commercial banks will lose appetite

Treasury Papers and the govt. will either turn to the SBP or opt for National Sa

Schemes, which will prove inflationary; and (b) Crowding‐out of private sector investm

during FY14!

Another challenge in this scenario stems from lack of revenue measures, reliable

dependable enough to address the brewing fiscal challenge. We thus do not rule out

possibility of a ‘Mini‐Budget’ in FY14, especially once Pakistan enters a new IMF program

To conclude, we foresee Pakistan’s economy as one marked by more deficit financing, m

inflation, deeper into debt and mediocre and low quality economic growth during FY14!

Thursday, June 13, 2013



AHC

Table of Contents

Title

Pakistan macro‐economic environment, FY13

Budget 2013‐14: Salient Features

Fiscal Deficit, FY2014?

Energy Sector Circular Debt

Tax Highlights of Federal Budget, 2013‐14

KSE: Neutral

Exploration &

Production:

Neutral

Oil Marketing: Neutral

Fertilizer: Neutral to Negative

Cement: Positive

Autos: Neutral

Textile & Chemicals: Neutral

Telecom: Neutral

Power Utilities:

Positive

Banks: Neutral

FMCG: Neutral to Negative



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Pakistan macro‐economic environment, FY13

Weaknesses

¾ Rising circular debt & resultant power outages;

¾ Deteriorating financial health of Public Sector Enterprises (PSEs);

¾ Rising debt servicing;

¾ War against terrorism & resultant poor law and order situation in the Country;

¾ Economic mis‐management; and

¾ Large informal economy;

¾ Declining investment to GDP ratio;

¾ Challenging external outlook with scheduled debt payments to the IMF;

¾ Declining foreign exchange reserves;

¾ Sluggish growth in FBR revenues;

¾ High govt. borrowings from SBP;

¾ Subdued Services

sector;

¾ Growth in major crops down during FY13 ‐ cotton & rice missed target only to

compensated by better crops of wheat & sugarcane;

¾ Growth in Money Supply (M2) due to surge in NFA, NDA and credit off ‐take

PSEs;

Strengths

¾ Declining inflation;

¾ Rising LSM growth;

¾ Modest growth in farm income stemming from surge in income of minor crop

livestock;

¾ High agri‐credit disbursements;

¾ Rising Foreign

Direct

Investment

&

Foreign

Portfolio

Investment;

¾ Remarkable performance by Karachi Stock Exchange;

¾ Contraction in trade deficit due to rise in exports & drop in imports;

¾ Modest surge in remittances;

Challenges

¾ Energy crisis must be handled on a sustainable basis;

¾ Issue of hemorrhaging Public Sector Enterprises must be addressed;

¾ Slow economic growth is resulting in higher unemployment levels, which is ha

negative social repercussions;



AHC

Budget 2013‐14: Salient Features

¾ Total outlay:

PKR3,985bn;

¾ Resource availability: PKR3,010bn;

¾ Net revenue receipts: PKR1,918bn;

¾ Net capital receipts: PKR493bn;

¾ External receipts: PKR576bn;

¾ Overall expenditure: PKR3,985bn – Current Expenditure, PKR3,196

Development expenditure, PKR789bn;

¾ Expenditure on General Public Survey: PKR2,3576bn;

¾ PSDP: PKR1,155bn – Federal PSDP: PKR540bn, Provincial PSDP: PKR615bn;

¾ Other development expenditure: PKR172bn;

¾ Bank borrowings: PKR975bn;

53%

14%

5%

1%

27%

RECEIPTS

Net Revenue Receipts Net Capital Receipts External Receipts Estimated Surplus

Bank Borrowings

32%

17%9%

7%

8%

1%21%

EXPENDITURE

Interest Payment Pension

Defence Affairs & Services Grant & Transfer

Subsidies Running of Civil Govt

Provision: Pay & Pension Development



AHC

Fiscal Deficit, FY2014?

The govt.

has

forecasted

fiscal

deficit

at

PKR1,651bn

(6.3%

of

GDP)

for

FY14.

We

m

caution our readers about certain assumptions that form the underlying base for

calculation and which, if not met, could push Fiscal Deficit, FY14 up:‐

1. Provincial Surplus of PKR23bn: If past speaks about the future, especially w

‘different’ political govt.’s in all four provinces, we question the rationality of

assumption!

2. Source of tax revenue: One of the major sources of tax revenue is Sales Tax at

including GST collection at retail levels based on printed retail price (PKR1,053.5

up 22pc) – All past attempts to document the economy have failed since 1986;

question is what makes the govt. feel this time such a move would be successfu

3. Surge in tax collections: Tax revenue has been forecasted at PKR2,598bn in F

against PKR2,124bn in FY13, up 22.3pc ‐ the question is what radical steps

planned and

can

be

enforced

which

can

facilitate

a 22.3%

YoY

growth

in

reven

despite 4.4pc GDP growth and 8pc inflation!

4. 3G Auction: It has been assumed that the govt. would be successful in conduc

3G Auction and has forecasted PKR120bn on this account against PKR79bn on

account last year – In the presence of a vibrant democratic proposition we bel

PKR120bn during FY14 is a bit over‐optimistic;

5. SBP profit: Surplus profit of SBP has been forecasted at PKR200bn in FY14 des

forecasted govt. borrowings of PKR975bn – compare this with SBP’s profit

PKR200bn in FY13 in a scenario of govt. borrowings of PKR1,575bn – this para

points to the only possibility of high Policy Rate (approx. 15pc) during FY14

scenario which we do not see!

6. Defence Services/CSF: Budgeted at PKR112bn in FY14, this is contingent

Pakistan’s co‐operation with USA in the War against Terror and facilitating U

withdrawal from

Afghanistan

in

2014.

Recall,

Pakistan

received

US$1.8bn

account of CSF proceeds in FY13 being outstanding bills released follow

settlement of ‘Salala Issue’. If the current ‘Drone Issue’ is not managed prope

there can be serious question marks on inflows under this head!

7. Eurobonds: Budgeted at PKR49.5bn in FY14, this amount appears in almost ev

budget despite the fact that the Country has not floated a Eurobond during the

few years!

8. Privatization Proceeds: Budgeted at PKR79.2bn in FY14 and reflecting

outstanding US$800mn payment from Etisalat on account of sale of PTCL,

amount appears in almost every budget! We understand this is a challenging is

and would hence be cautious to include such an amount when arriving at the f

deficit;

9. Subsidy:

Subsidy

to

WAPDA

&

KESC

has

been

fixed

at

PKR220.1bn

during

Fagainst total subsidy of PKR349.29bn during FY13 – this is only possible if T

Differentials are checked and actual costs pass‐on to consumers!



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Energy Sector Circular Debt

We mention

below

causes

of

the

energy

sector

circular

debt

as

mentioned

in

a repor

the Energy Sector Circular Debt, commissioned by the Planning Commission of Pakistan

funded by the USAID:

Primary causes of circular debt:

¾ Poor governance;

¾ Delays in tariff determination by an inadequately empowered regul

compounded by interference and delay in notification by the Govt. of Pakistan;

¾ A fuel price methodology that delays infusion of cash to the power sector;

¾ Poor revenue collection by the DISCOs;

¾ Delayed and incomplete payment by the Ministry of Finance on TDS and K

contract payments;

¾ Prolonged stays

on

fuel

price

adjustments

granted

by

courts;

¾ Transmission and distribution losses and theft;

Secondary causes of circular debt:

¾ The need to improve the thermal efficiency of the GENCOs and for NEPRA to

tariffs based on actual vs. estimated heat rates;

¾ Inadequate budgeting of the TDS, which delays payment and increases finan

costs;

¾ Unfavorable generation mix of the GENCOs, due largely to the GOP’s

allocation policy that diverts natural gas to other non‐economic uses;

¾ Non‐commercial approach to load shedding;

¾ Non‐improvement in tariff terms and conditions;

¾ Impact of

court

decisions

that

have

delayed

payments

to

the

DISCOs;

¾ Late payment surcharges paid by CPPA to the IPPs resulting from the inabilit

the DISCOs to fully pay CPPA;

¾ GOP’s neglect in promoting demand‐side management, energy efficiency

renewable energy resources;

¾ The need to settle payment arrears (both disputed and undisputed) i

comprehensive manner;

¾ The need for expanded authority of CPPA to collect payments from the DIS

through formal and enforceable PPAs;

Circular Debt (Source: Planning Commission of Pakistan) PKR, Billion 2008 2009 2010 2011 2012 Op. Stock 145 161 236 366 538

Non‐Collections 53 30 (25) 81 101

Tariff & Subsidy (36) 45 155 91 234

Circular Debt 161 236 366 538 872



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Tax Highlights of Federal Budget, 2013‐14

Income Tax

¾ Existing six slabs of salaried individuals to be increased to twelve;

¾ Existing five slabs for business individuals and AOPs to be increased to seven;

¾ Carry forward of unadjusted minimum tax to be extended to Individuals and AO

this was previously restricted to corporate sector;

¾ Currently, reduction in minimum tax is restricted to distributors of cigarette

corporate sector; this is being extended to individuals and AOPs;

¾ Currently, Corporate Income Tax Holiday, for a period of 5 years, is availabl

projects in Special Economic Zones; this is being extended to 10 years;

¾ Currently, goods transport vehicles are subject to WHT on payment of provin

motor vehicle tax; they are also subject to WHT @ 2% on providing trans

services. Now, WHT on payment of provincial vehicle tax shall be adjustable;

¾ Withholding tax

on

import

of

Hybrid

cars

with

engine

capacity

up

to

1200CC

been exempt; withholding tax up to 1800CC has been reduced by 50%; and

for vehicle up to 2500CC;

¾ Facility of exemption certificate on import of raw material is being reintrodu

subject to payment of tax liability determined for any of the preceding two year

¾ Rate of tax for non banking companies is being reduced from 35% to 34%;

¾ Tax on dividend received by banks from Money Market Funds and Income Fund

be @ 25% for Tax Year 2014 onwards;

¾ Existing three slabs for property income to be increased to six;

¾ Adjustable withholding tax being introduced to be collected

Hotels/Clubs/Marriage Halls/Restaurants etc. from persons arranging functions

¾ Adjustable withholding tax to be levied on renewal and license fee of c

operators and other electronic media; to be collected by PEMRA;

¾ Transactions of

margin

financing,

trading

financing

and

lending

to

be

subjec

withholding tax @ 10% of the profit/markup/interest earned. Tax to be collec

by NCCPL from margin financers, trading financers and lenders;

¾ Minimum Tax @ 0.5% of turnover is payable by companies, certain individuals

AOPs in case of declared losses or if the tax payable on the declared income is

than the Minimum Tax. Rate is to be restored to 1%;

¾ Rate of Withholding Tax on cash withdrawals from banks has been raised to 0

maximum limit of daily withdrawal to stand at PKR50,000/‐;

¾ Payment of minimum tax at PKR25/sq ft of constructed area sold and PKR50

yard of area sold of developed land, respectively is being introduced;

¾ To rationalize contribution of wholesale and retail sector towards tax reven

withholding tax shall be collected from Electronics, Sugar, Cement, Fertilizers,

&

Steel

Products,

Motorcycles,

Pesticides,

Cigarettes,

Glass,

Textile,

BeveraPaints & Foam sectors; rate is being reduced to 0.1%. Scope of withholding ta

also being extended to retailers. Withholding tax @ 0.5% by the distribut

manufacturers or commercial importers from the retailers is proposed;

¾ Rates of tax on registration of motor vehicles to be enhanced; Withholding tax

10 years to be collected in lump sum at the rates specified in first schedule;

¾ Separate rates of withholding tax to be introduced for corporate and

corporate sectors with the objective to encourage corporatization and to enha

revenue and to ensure effective enforcement of fiscal codes;



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¾ Dealers acting as commission agents for different commodities in the markets s

pay withholding tax, to be collected by market committees, as follows:‐ Grou

PKR10,000; Group

B:

PKR7,500;

Group

C:

PKR5,000;

Any

other

category:

PKR5,0

¾ Adjustable withholding tax on foreign‐produced films, TV serials and plays et

be collected by authority responsible for their censoring/certification at the rat

PKR1mn for films and PKR100,000 per episode for TV plays;

¾ Tax at time of sale of any property or goods by auction is proposed to be enhan

from 5% to 10%;

¾ An adjustable advance tax @ 5% of fee of all educational institutions where an

fee is above PKR200,000 to be collected by educational institutions at the tim

receipt of fee from the person paying the fee;

¾ Rate of deduction of withholding tax, which is final tax on payment of prize

prize bond to be enhanced from 10% to 15%;

¾ Rate of initial depreciation to be reduced from 50% to 25% for Plant

Machinery;

¾ Exemption limit

of

withholding

tax

for

investment

in

National

Saving

Centers

to

withdrawn;

¾ Exemptions provided in 2nd schedule to the Income Tax Ordinance 2001 are

to be withdrawn for being discriminatory: (i) Exemption to dividend in specie

Free/concessional passage provided by transporters; (iii) Taxation at reduced

of 2.5%; (iv) 75% reduction in tax payable by a full time teacher or a researcher

Any income of any university or other educational institution established solely

educational purposes;

Sales Tax & Federal Excise

¾ Enhancement in standard rate of sales tax from 16% to 17% with further tax @

on taxable supplies to a person who has not obtained registration number;

¾ Withdrawing sales

tax

exemption

on

milk

preparations

obtained

by

replacing

or more constituent of milk by another substance and supplies aga

international tender;

¾ Charging sales tax @ 5% in addition to the standard of 16% on non‐registe

commercial and industrial consumers of electricity and gas having monthly bi

excess of PKR15,000/‐;

¾ Rate of federal excise duty on aerated beverages to be increased from 6% to

and introduction of capacity based taxation on aerated beverages to stop eva

and malpractices in the sector;

¾ Three tier structure of chargeability of FED on cigarettes to be replaced by two

specific rate structure;

¾ Federal Excise Duty @ 40 paisa/kg on imported seeds, PKR1/per kg on loc

produced oil and 10% ad.val. on motor vehicles of cylinder capacity of 1800c

above to

be

charged;

¾ All kinds of financial services chargeable to Federal Excise Duty @ 16%;

¾ Exemption of Federal Excise Duty on hydraulic cement and services provided

rendered by Asset Management Companies to be withdrawn;

¾ Substituting zero‐rating with exemption on items of non export oriented sector

¾ Excl. of finished consumer goods from list of items chargeable to sales tax @ 2%

¾ Expansion of scope of withholding regime for withholding of whole of amoun

tax by withholding agents on purchases made from unregistered persons;



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Customs

¾ Further reduction

in

duty

&

taxes

on

Hybrid

Electric

Vehicles

ranging

from

25%

100%, according to their engine capacity;

¾ Duty free import of “bio re‐absorbable vascular scaffold”;

¾ Exemption of duty and sales tax on energy saving tubes presently @ 20% duty;

¾ Streamlining and deregulation of the procedure for exempt import of renew

energy resources compatible equipment;

¾ Reduction of customs duty on office or school supplies from 25% to 20%;

¾ Duty & sales tax free import of solar submersible pumps presently @ 20% duty;

¾ Reduction of duty on water treatment & purifying machinery and equipment f

20% to 15%;

¾ Streamlining procedure for re‐import of machinery & equipment sent abroad

repair etc by industrial importers;

¾ Reduction of customs duty on Medium Density Fiber (MDF) Board;

¾ Creation of

separate

PCT

codes

of

newly

indigenized

vehicles;

¾ Creation of new PCT code for classification of satellite phone and water dispens

¾ Increase in duty on betel nuts from 15% to 20% and betel leaves from PKR200

to PKR300/kg;



AHC

KSE: Neutral

Issue: Separate

rates

of

tax

Proposal: Separate rates of withholding tax to be introduced for corporate and n

corporate sectors with the objective to encourage corporatization and to enhance reven

Impact: Neutral

Issue: Tax on margin financing, trading financing & lending

Proposal: Transactions of margin financing, trading financing & lending shall be subjec

WHT @ 10% of profit earned. Tax to be collected by NCCPL from margin financers;

Impact: Neutral to Positive

Issue: Reduced

rate

of

tax

for

companies

Proposal: To provide relief to corporate sector & improve documentation of the econo

it has been proposed that tax rates for listed companies be reduced from 35% to 34%.

Impact: We foresee a 1% reduction in corporate tax rate leading to 2.8% positive impac

bottom‐line of companies falling under the purview of corporate tax rate regime ‐ Positiv

Issue: Exemption limit of WHT for investment in NSS to be withdrawn

Proposal: It is proposed to remove exemption limit of WHT for investment in Nati

Savings – Profit on investment greater than PKR150,000/‐ is taxed at 10%;

Impact:

Neutral

Issue: Tax on payment of prize bonds

Proposal: It is proposed to raise final tax on payment of prize on prize bonds to 15%;

Impact: This step may encourage investment at the bourses; ‐ Neutral to Positive

Issue: Exemptions in 2nd

Schedule withdrawn

Proposal: It has been proposed to withdraw some exemptions in 2nd

Schedule to Inco

Tax Ordinance, 2001 including besides others, ‘Exemption to dividend in Specie’

Impact: We understand ‘dividend in specie’ is not quite common at KSE (AHCL iss

Convertible Pref.

Shares

of

ASL

as

‘dividend

in

specie’).

‐Neutral

to

Negative

Issue: FED on financial services

Proposal: It is proposed to levy 16% Federal Excise Duty (FED) on all financial serv

provided by a person who is neither a bank nor a non‐banking finance company like A

withdrawal fee, asset management companies, foreign exchange dealers, modarbas, etc

Impact: Neutral



AHC

Exploration & Production: Neutral

Picks: PPL

Issue: Payment on account of outstanding stock of circular debt

Proposal: The govt. has agreed to pay off circular debt – currently at PKR503bn – within

next 60 days. A comprehensive energy policy is planned to be implemented in this regar

Impact: We understand resolution of circular debt would help remove the outstan

stock of energy sector circular debt despite raising Pakistan’s outstanding debt stock.

liquidity relief will facilitate high dividend payout in the E&P sector – Positive



AHC

Oil Marketing: Neutral

Picks: PSO

Issue: Petroleum Levy

Proposal: Petroleum Levy (PL) has been fixed at PKR120bn in Budget 2014 aga

PKR115bn in FY13 (Actual);

Impact: PL target for FY14 is almost same as the PL target for FY13. We understand rec

of petroleum levy shall, however, be contingent on: (i) International crude prices; and

Govt.’s ability to increase POL products’ prices in tandem with surge in international cr

prices ‐ Neutral;

Issue: Gas allocation

Proposal: In line with the directions set by the ECC of the Cabinet’s meeting of Jan 20

prioritization of gas under the load‐management has continued in Budget 2014 as w

according to which: First priority for availability of gas will be given to domestic users of

Second priority will be given to the power plants and gas quota for power plants will also

increased; Third and fourth priority will be given to industrial users and the cement sec

Least priority will be given to the CNG sector;

Impact: ‐ Neutral;






liquidity relief will facilitate high dividend payout in the OMC sector – Positive



AHC

Fertilizer: Neutral to Negative

Picks: None

Issue: Increase in Sales Tax to 17pc

Proposal: It has been proposed to raise standard rate of sales tax from the existing 16%

17% and impose 2% ‘further tax’ on supplies to un‐registered persons. It has also b

proposed to charge sales tax on the basis of printed retail price on fertilizer;

Impact: The above mentioned steps may push urea prices by PKR17/bag and DAP price

PKR60/bag, which in‐turn may affect purchasing power of buyers and hence fertilizer s

negatively! – Negative

Issue: Gas Infrastructure Development Cess (GIDC)

Proposal: It has been proposed to keep Gas Infrastructure Development Cess (GI

currently levied on gas supplied to fertilizer plants for power generation (PKR197/MM

on feedstock and PKR50/MMBTU on fuel gas) unchanged;

Impact: Fertilizer prices have risen by PKR90/bag due to imposition of GIDC aga

requirement of PKR260/bag. If fertilizer sector is able to pass‐on the impact of impositio

GIDC on to consumers, it could bode favorably for fertilizer sector margins; ‐ Neutral

Issue: Agri reforms

Proposal: It has been proposed to support agriculture sector through enhanced agri‐cr

disbursement target; improvement in water channel;

Impact: All

this

should

bode

favorably

for

agriculture

sector

and

hence

fertilizer

off

‐tak

Positive



AHC

Cement: Positive

Picks: LUCK,

DGKC

Issue: Bourgeoning PSDP allocation

Proposal: The National Economic Council has approved PKR1,155bn development proj

including Federal Public Sector Development Programme (PSDP) of PKR540bn

PKR615bn of Provincial PSDP with special focus on water, energy, road, rail and trans

and communication networks.

Impact: Surge in PSDP allocations along‐with focus on water, energy, road, rail

transport and communication networks may push domestic cement demand and indus

wide capacity utilization up – Positive!

Issue:

Increase

in

Sales

Tax

to

17pc

Proposal: It has been proposed to raise standard rate of sales tax from existing 16% to

and impose 2% ‘further tax’ on supplies to un‐registered persons.

Impact: Cement manufacturers would pass‐on the 1% increase in Sales Tax (PKR3.5/bag

consumers – Neutral

Issue: No change in FED on cement

Proposal: As against market concerns of surge in FED on cement in Budget 2013‐14

Federal Excise Duty (FED) has been levied in Budget 2013‐14. FED has only been levied

hydraulic cement;

Impact: We

thus

conclude

FED

would

‘finish’

in

FY14

–

Positive

Issue: Gas Infrastructure Development Cess (GIDC)

Proposal: Gas Infrastructure Development Cess (GIDC), currently levied on gas supplie

cement plants for power generation, has not been removed in Budget 2013‐14.

Impact: GIDC is currently levied at PKR50/MMBTU on gas used by cement plants for po

generation. – Neutral



AHC

Autos: Neutral

Picks: PSMC

Issue: Rate of tax on registration of motor vehicles

Proposal: Rates of tax on registration of motor vehicles (Sec 231B, Division VII, Part IV,

Schedule, Income Tax Ordinance, 2001) have been hiked such that at the highest end t

have multiplied almost 3x! Likewise a new paragraph has been added where provin

motor vehicle tax is collected in lump sum – still quite exorbitant;

Impact: We understand this tax is pass‐through in nature; ‐ Neutral

Issue: Withholding tax on goods transport vehicles

Proposal: Currently, goods transport vehicles are subject to withholding tax at the tim

payment of provincial motor vehicle tax; they are also subject to withholding tax @ 2%

providing transport services. Now, withholding tax on payment of provincial vehicle

shall be adjustable;

Impact: Neutral

Issue: 50pc cut in import duty on hybrid vehicles

Proposal: In view of shortage of CNG and increase in petrol prices in the coun

Withholding tax on import of Hybrid cars with engine capacity up to 1200CC has b

exempt; withholding tax up to 1800CC has been reduced by 50%; and 25% for vehicle u

2500CC;

Impact: We

understand

Indus

Motors

Company

plans

to

introduce

its

hybrid

car

–

‘In

Prius Hybrid’ in 3QCY2013. Given slash in import duty on hybrid vehicles, we fore

positive impact of this step on IMC scrip!



17% and impose 2% ‘further tax’ on supplies to un‐registered persons.

Impact: Auto assemblers would pass‐on the increase in Sales Tax on consumers – Neutra

Issue: 10% FED on import/local manufacturer of cars

Proposal: It has been proposed to impose 10% Federal Excise Duty (FED) on import

local manufacturing of cars of above 1800cc engine capacity.

Impact: Auto assemblers would pass‐on this increase in FED on consumers – Neutral



AHC

Issue: Govt.’s refusal to reduce GST on tractors to 5%

Proposal: No

announcement

in

Budget

2014

regarding

reduction

in

General

Sales

Tax

(G

on tractors from the existing 10% to 5%;

Impact: Tractor manufacturers may raise tractor prices post Budget 2014; this should b

negatively for tractor sales in the long‐run!

Issue: Auto Industry Development Plan (AIDP)

Proposal: AIDP‐II is due since end‐Jun 2012. Had the govt. addressed this issue in Bud

2013‐14, it would have provided clarification on changes in duty structure of CKD units

CBUs.

Impact: Neutral



AHC

Textile & Chemicals: Neutral

Picks: NML,

NCL

Issue: Hike in minimum tax to 1.0%

Proposal: Minimum Tax @ 0.5% of turnover is payable by companies, certain individ

and AOPs in case of declared losses or if the tax payable on the declared income is less t

the Minimum Tax. Rate is to be restored to 1%;

Impact: Neutral to Negative

Issue: Initial allowance reduced

Proposal: The rate of initial (depreciation) allowance has been slashed from 50% to 25%;

Impact: Negative

for

new

entrants

in

the

business



17% and impose 2% ‘further tax’ on supplies to un‐registered persons.

Impact: Textile manufacturers would pass‐on the 1% increase in Sales Tax on consume

Neutral



AHC

Telecom: Neutral

Picks: None

Issue: Tax imposed on sale, activation of sim cards

Proposal: The FBR has imposed sale tax of PKR250 to be collected at the time of sal

activation of a sim. On the other hand, FBR has imposed PKR150 tax on low priced mo

phones; PKR250 on medium priced mobiles and PKR500 tax has been on smart cell

phones;

Impact: Neutral

Issue: Payment from Etisalat?

Proposal: 26% shares of PTCL were sold to Etisalat for US$2.598bn and the company

paid US$1.799bn with the result that outstanding amount from Etisalat stands

US$799mn. As per the Sale‐Purchase‐Agreement, the amount would be paid after tran

of properties in possession of PTCL to Etisalat. Although allocation of PKR79.2bn on this

has been made in Budget 2014, we remain skeptical;

Impact: Neutral

Issue: 3G auction

Proposal: The previous govt. had tried thrice, though unsuccessfully, to conduct 3G auc

with a base price of US$210mn. We understand the present PML‐N led govt. had claime

its election manifesto that it will move directly to 4G technology to ensure fast‐t

introduction of modern information and communication technology. It also said it

promote and

facilitate

the

software

industry

to

develop

applications

accessible

through

and LTE networks.

Impact: The Finance Minister has claimed conducting 3G Auction in July 2013 with a ta

of PKR120bn. This could force the govt. to revisit the base price of US$210mn linked to

license & may drag the process!



AHC

Power Utilities: Positive

Picks: HUBCO

&

KAPCO






liquidity relief will facilitate high dividend payout in the power sector – Positive

Issue: Subsidies?

Proposal: The govt. has budgeted PKR240.434bn subsidies in Budget 2014 aga

PKR367.472bn (FY13, Actual). We appreciate that an Energy Committee is fast working

how to not only resolve the energy sector debt but also to prevent its re‐occurrence.

must, however, identify that the IMF has already given a road‐map for long‐term resolu

of energy sector circular debt, which requires the govt. to implement the following: (i) T

Differential Subsidies on electricity of around PKR3.5/unit (Govt. is charging an average

of PKR9.0/unit from consumers as against its average purchase price of PKR12.50/unit

gradually phased out within four years; (ii) Use of gas for producing power – Given

current gas shortage in the Country this implies shifting gas from power, fertilizer sec

etc to power; (iii) Dissolution of PEPCO and giving autonomy to DISCOs with independ

boards of directors.

Impact: Neutral

Issue: Bourgeoning

PSDP

allocation

Proposal: The National Economic Council has approved PKR1,155bn development proj

including Federal Public Sector Development Programme (PSDP) of PKR540bn

PKR615bn of Provincial PSDP with special focus on water, energy, road, rail and trans

and communication networks. PKR225bn has been allocated in energy sector for FY14 w

PKR107bn under PSDP and PKR118bn to be arranged by WAPDA. PKR52bn has b

approved for Wapda and Pepco and PKR59bn for water resources; PKR17bn has b

allocated for the purpose of land acquisition of Diamer‐Bhasha Dam and another PKR8.

for its construction; PKR25bn has been allocated for Neelum‐Jhelum Hydel Proj

PKR14bn for Tarbela extension; PKR5.5bn for Golan Gol Dam and PKR3.3bn for Do

Khawr project; PKR3.5bn has been earmarked for Mangla Dam and PKR5.2bn for K

Canal; PKR42bn has been allocated for Chashma Nuclear Power Plants and PKR10bn

Karachi Costal Power Project.

Impact: Surge in PSDP allocations along‐with focus on water, energy, road, rail

transport and communication networks should bode favorably for energy sector – Positi



AHC

Issue: Levy of additional sales tax

Proposal: It

is

proposed

to

levy

5pc

additional

sales

tax

on

supply

of

electricity

and

gas

t

un‐registered industrial and commercial consumers having monthly bill excee

PKR15,000/‐;

Impact: Neutral

Issue: Efficient electrical equipments

Proposal: The following steps have been proposed in this regard: (i) Exemption of duty

sales tax on energy saving tubes presently @ 20% duty; (ii) Streamlining and deregulatio

the procedure for exempt import of renewable energy resources compatible equipm

and (iii) Duty & sales tax free import of solar submersible pumps presently @ 20% duty;

Impact: Neutral



AHC

Banks: Neutral

Picks: MCB

Issue: WHT on cash withdrawal from banks

Proposal: It has been proposed to levy withholding tax (WHT) at 0.3% for cash withdra

of over PKR50,000/day.

Impact: Banks would pass‐on the impact of increase in WHT on to its depositors. – Neutr

Issue: Economic growth agenda

Proposal: Budget 2014 has focused on an economic growth agenda with issues such

resolution of energy sector circular debt and pro‐investment being the theme of

Budget. This shall bode favorably for private sector credit off ‐take and hence au

favorably for banks.

Impact: Neutral to Positive;

Issue: Tax rate on dividends received by banks from MM & IF

Proposal: Through an amendment introduced in Rule 6 of the Seventh Schedule vide

Finance Act, 2011 dividends received by a bank from its asset management company w

subjected to tax at 20% instead of the general rate of 10%. Through Finance Act, 2012

Bill proposed that dividends received by banks from money market funds and income fu

shall be taxed at the rate of 25% for the tax year 2013 (income year ending 31 Decem

2012). For the tax year 2014 and onwards, the rate was proposed to be equated with

current tax rate applicable to general banking income which is 35%.

However, through Budget 2014, it has been proposed to tax dividend received by ba

from Money Market Funds and Income Funds @ 25% for Year 2014 and onwards.

Impact: It is evident that investment income received by banks from MMF & IF would

taxed at lower than that as proposed via Finance Act, 2012. ‐ Positive



AHC

FMCG: Neutral to Negative

Picks: None

Issue: Withdrawing sales tax exemption on milk preparation

Proposal: It has been proposed to withdraw sales exemption on milk preparations obtai

by replacing one or more constituent of milk by another substance and supplies aga

international tender;

Impact: We understand such a move would be counterproductive since its financial imp

would be passed‐on to the end consumers who may partially switch to lose milk f

packaged milk; – Negative for Nestle and Engro Foods;

Issue: FED on cigarette

Proposal: A two tier specific rate structure has been introduced – For locally produ

cigarettes, if their on‐pack printed retail price exceeds PKR2,286/1,000 cigarette, duty to

levied at PKR2,325/1000 cigarettes; and For locally produced cigarettes, if their on‐p

printed retail price does not exceed PKR2,286/1,000 cigarette, duty to be levied

PKR880/1000 cigarettes;

Impact: We appreciate in‐elastic nature of cigarette sales ‐ any increase in price of cigar

is thus bound to be passed on to end‐consumers with minimal effect on sales volum

Neutral

Issue: FED on aerated beverages

Proposal: It has been proposed to raise rate of Federal Excise Duty (FED) on aera

beverages from

6%

to

9%

and

introduce

capacity

based

taxation

on

aerated

beverages;

Impact: We understand the above mentioned taxation measures would help stop

evasion and malpractices in the sector; any increase in price of beverages is bound to

passed on to end‐consumers with minimal effect on sales volume! – Neutral



AHC

Disclaimer

All rights

reserved.

The

information

presented

in

this

report

is

compiled

from

sources

believed to be reliable in preparation of this report. However, we do not accept

responsibility for its accuracy and completeness. This report is not intended to be an o

or solicitation to buy or sell any security. AL Habib Capital Markets (Pvt.) Ltd. and

employees may or may not have a position in or with respect to the securities mentione

this report. In particular, the report takes no account of investment objectives, finan

situation & particular needs of investors who should seek further professional advice or

upon their own judgment before making any investment.

Head of Research: Hasnain Imam

Contact: [email protected]

Supervising Database Officer: Abdul Samad

Contact: [email protected]

Date of distribution: June 13, 2013

Head Office:

GF‐01, Techno City,

Hasrat Mohani Road, Karachi

Ph: +92 21 32270808‐13

Fax: +92 21 32270519

Stock Office:

Room No. 16 Ground Floor,

New Stock Exchange Bldg.,

Stock Exchange

Road,

Karachi

Ph: +92 21 32460867‐ 32460869

budget report fy'13-14

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