Impact of Budget 2021-2022 on different sectors of Pakistan:
The federal Budget of 2021-2022 has been a positive one and has shown signs of growth. It can help the Pakistani economy get better and can help Pakistan pay its pending Debts. The federal Budget of 2021-2022 has had an impact on many of the sectors and many firms can benefit from them and can provide investors with a very good opportunity to invest in the stock of these companies. The projected GDP growth is about 5% from the Budget of 2020-2021 which was approximately 3.9% after revision.
A key measure in Budget 2021-2022:
General (Positive):The second amendment act involves in reduction of customs duties and reduced taxation and income so to promote production activities. This act has been made part of the financial bill that was announced before the budget 2021-2022 announcement in March 2021. Reduction in Additional Custom Duties (ACD) led to a decrease of custom duties from 6% to 7% in this budget 2021-2022. As far as the tax on electricity is concerned the withholding tax of 7.5% now has a cap of Rs 25000 Which was previously Rs 75000.
Capital Markets (Positive):The capital gain tax rate has decreased to 12.5% from the previous 15%. A lower capital gains tax rate may promote more investment by reducing the disincentive to invest, resulting in faster economic growth. Block income to be imposed on interest income of more than Rs 5million. A tax of 10% will be charged on pension funds representing profit on Debt.
Cement (Positive):
National Public sector development program’s allocation was increased from 1.32 trillion to 2.14 trillion. This is good news for the building industry, particularly cement because greater development spending means greater cement demand. This larger PSDP allocation is expected to be captured in the base assumption of a 10% cement sales increase in FY22, according to the industry. Extraction of minerals is the main process of cement production and there is a reduction in 5% withholding tax. Moreover, turnover tax is reduced from 1.5% to 1.25%. The cement sector is also hit by turnover tax during periods of oversupply when earnings are low. In low-margin periods, we believe a reduction in turnover tax will assist cement companies' cash flows. A Rs 33billion subsidy for the housing scheme has been allocated which means more use of cement and help investor and provide them with investing opportunity. The government has set up Rs30 billion for the Naya Pakistan Housing Scheme, as well as Rs3 billion for markup subsidies. We believe that low-cost housing will continue to stimulate cement demand. Beneficiaries include LUCK, MLCF, and THCCL.
Steel (Positive):
Hot rolled coil (HRC), raw material for cold-rolled coil (CRC), prices are already on the drop in the international market and being an importer Steel sector was witnessing a positive impact. With the budget 2021-2022 the government imposed Exemption of Custom duties (CD) from 5% HRC.
HRC imports are currently subject to levies of 18-20% for flat steel makers. Duty reductions or eliminations will have a considerable influence on business profitability. PSDP budget allocation increased having a positive impact on the construction sector in which steel is the main part. Beneficiaries include ISL, ASL, CSAP, and INIL.
Autos (Positive):
Sales tax is reduced on the electrical vehicles to 1% for local manufacturers. This will allow more people to buy electric cars and make the world a sustainable place. These policies will encourage companies to build electric vehicles in Pakistan, but they will be contingent on the development of necessary infrastructures, such as charging stations, around the country. Sales tax reduced on vehicles under 850cc from17% to 12.5% and FED will also be removed. This strategy is expected to result in a 7% reduction in car pricing in the 850cc and lower category. PSMC, the only publicly traded participant in the segment, is expected to benefit from lower prices, which could improve automobile sales. If implemented, this plan might lower the cost of old imported vehicles and provide PSMC some competition. Due to operational challenges in importing cars into Pakistan, the volume of the same is expected to remain low. If the vehicle is disposed of without registration, there is a tax on “on” money on vehicles. This will deter the practice of paying "on" money (a premium above the quoted price) for quick auto-delivery. However, putting the plan into action could be difficult. Beneficiaries include PSMC , GAIL.
OMC’s and Refineries (Neutral to Positive):
Petroleum is set to provide Rs 610billion in financial year 22 as compared to Rs 450billion in the previous financial year. It is proposed that zero-rating be removed from petroleum crude oil, parts/components of zero-rated plant and machinery, plant and machinery imports by the petroleum and gas sector, and ship supply, repair, and maintenance.
Industries do not anticipate a significant impact because any increased costs associated with crude might be passed on to consumers, but a charge on petroleum products could be imposed in the future to help the refinery sector.GST on RLNG is increased from 12% to 17%. Circular debt flow is also a problem to be dealt with. The problem of circular debt is likely to persist. This viewpoint is supported by the likelihood of a status quo on power tariffs, as expressed by concerned ministries in numerous briefings. For OMCs, we believe this is a positive step. There is also a reduction in turnover tax on refineries from 0.75% to 0.5%. Refinery turnover tax has been reduced from 0.75 percent to 0.5 percent. This is a great trend for the sector, as most refinery companies are either operating at a low margin or losing money. But on the other hand, there is no change in turnover tax for OMCs. The rest of the sector's turnover tax has been reduced from 1.5 percent to 1.25 percent. In the case of OMCs, however, this percentage has stayed steady at 0.75 percent. For the sector, this is a neutral development. Beneficiaries include PSO, BPL.
Fertilizers (Neutral to Positive):
There has been an allocation of 12bn for the development of the agriculture sector. However, it is uncertain how much money will be spent on DAP fertilizer because there was market speculation before the budget announcement that the government will distribute cash for DAP subsidy with province involvement. Due to the lack of visibility on the DAP subsidies, we view these developments to be neutral for the time being. There is still a sales tax imbalance on inputs and outputs. The government has not decreased the sales tax on fertilizer raw materials (feed and gasoline). The fertilizer makers' group proposed this. Companies impacted by the budget 2021-2022 in this sector include FFC , FFBL, ENGRO, FATIMA.
Banks (Neutral to Positive):
There has been an abolishment of withholding tax on cash withdrawal and other cash-related transactions and other banking instruments. This step, we believe, is being taken to reduce the amount of money in circulation. This will almost certainly increase banking transactions, which will be neutral to positive for the industry.
No change in the Super tax has been discussed. Because the government has not made any adjustments to the super tax, we do not expect any impact. The banks affected by the financial budget 2021-2022 are NPB, BOP, SILK, JSBL.
Telecom (Neutral):
For the tax year 2022, withholding tax rates for mobile phone and prepaid internet or telephone cards were cut from 12.5 percent to 10 percent, and then to 8% from then on. Users of mobile phones will now pay a lower WHT of 10% instead of 12.5 percent on mobile services, while other charges such as calls and SMS may reduce the benefit to customers. It will not affect the telecom sector. It is proposed that the telecom sector be expanded. It is proposed that the status of the industrial undertaking and the tax on communications services be decreased from 8% to 3%. This will benefit PTC since it will not only be subject to lower taxes, but it will also profit from the status as an industrial undertaking. FED on mobile phone calls exceeding 3 minutes at Rs 1 per call, SMS message at Rs. 0.1/SMS, and internet data usage at Rs. 5 per GB. The planned tax on internet usage may not go through since the FED fee on internet usage was not approved by Cabinet and will most likely not be included in the Finance Bill. The remaining steps may have a severe impact on companies like PTC, which owns UFONE and is also in the cellular communications business. Companies of the KSE 100 index affected by these changes include PTC, NETSOL, SYS, AVN.
Exploration and Production (Neutral to Negative):
The government of Pakistan has proposed Rs 90 billion as dividend income in the financial budget 2021-2022. There is no significant development and changes on the circular debt of natural gas. The cash flow condition of Sui businesses has a significant impact on E&Ps. For the natural gas chain, this budget has largely remained a non-event.
There is an increase from 12% to 17% in sales tax on RLNG. Increased GST on RLNG will increase the burden on end-users, putting Sui businesses under even more financial duress. As a result, E&P businesses doing business with Sui businesses like PPL and OGDC would suffer. Companies that will suffer are PPL, OGDC.
Textile (Neutral to Positive):
There is a Reduction in ACD, CD, and Regulatory Duties on the imports of numerous raw materials. This will be beneficial to the textile industry since it will help to enhance margins by eliminating additional customs and regulatory duties. Removing ACD from raw materials lowers raw material costs, making it more competitive in the international market among regional competitors. Because the value-added category accounts for 65-70 percent of total textile exports, eliminating duties will result in lower raw material costs and increased profitability. The government has not restored zero-rating on the textile sector. We anticipate that this decision will be neutral for the industry, as the government has already implemented the FASTER refund mechanism SERF , SMTM, SYS, ASHT are the companies that will benefit from these amendments.
