KARACHI – Preliminary analysis indicates that the new tax imposed by the government will erode profits by an average of two percent in FY11 on individual companies at the Karachi Stock Exchange, while the fiscal deficit is expected to cap in the vicinity of six percent, a figure which is deemed sufficient to mitigate the need of greater deficit financing.
However, the introduction of GST on fertiliser, pesticides, in tandem with the flood tax is likely to have a negative bearing on inflationary pressures and inflation forecast, going forward, as the prices of perishable food groups are anticipated to augment by 10% post these steps. Moreover, the rising inflationary concern will be neutralized through contained deficit and expect SBP to keep the policy rate intact in the upcoming policy review, said Muzzamil Aslam at JS.
It is to be noted that to contain the fiscal deficit is around 5.5 percent, the government has introduced new measures in the form of fresh taxes and expenditure cuts for the remainder of the current fiscal year. The measures were announced through a Presidential Ordinance after the government failed to reach consensus with the opposition and its allied partners.
Consequently, political noise is expected to gear up in the days to follow, as majority of the tax measures announced are inflationary in the short run. From the stock market’s perspective, these are either negative or will have limited impact, as corporate earnings are poised to erode by 1.5 percent to 19.5 percent in FY11. In the medium to long-run, it is stressed these will shape well for the market in the form of renewed fiscal space and in turn stable monetary policy, he added.
The measures that were announced by the government include 15 percent flood surcharge on income tax liabilities which will be applicable on the taxes currently being paid; withdrawal of all GST exemptions on fertiliser, pesticides, tractors, sugar and plant and machinery, and the applicable rate of GST on such items would be 17 percent now. The Special Excise Duty (SED) rate has too been increased to 2.5 percent from existing one percent The SED is applicable primarily on cements, cigarettes and beverages.
With these, the government is expected to contain the deficit by an incremental Rs120 billion (including Rs 53 billion through taxes and Rs 67 billion through curtailed expenditures).
