The corporate sector may take a hit of an average of 19 percent on their FY12E/CY12E earnings with banks and cement manufacturers taking most of the damage caused by the imposition of the Gross Asset Tax (GAT) which is under consideration for the Budget FY12.
Given full-year accounts of the listed sector companies having greater portion of their assets placed under the fixed asset category, higher leverage while in an expansion mode, or highly depreciated fixed assets, would be more prone to such tax implementation.
It is indicated that the tax will be applied only on gross ‘fixed’ assets this time around as levying it on total gross assets might trigger a backlash from the energy-oil sector companies, which have huge current assets (receivables on account of circular debt), said Khurram Schehzad at Investcapital.
It is believed that the government may consider such measures to support overall tax collection effort (FY12 target of Rs 1,950 billion, already up 26 percent since last year against the revised FY11 target). The possibility of imposition is heightened by the fact that the government could not ram through the RGST in parliament, the cut in petroleum price levies and lastly the fact that the GAT would have the least impact on the already tax-burdened society.
Thus, if applied, though one-off, the equity market may take a breather as earnings of the listed corporate sector will take a one-time hit, he said, adding that since better earnings growth are expected ahead, GAT may be absorbed with a relatively small blow by the corporate at the same time.
The GAT (Gross Asset Tax) is a revenue measure that is to be used as a one-time levy to be imposed on sector assets (at historical costs as provided on corporate balance sheets). The tax is taken into account to support government tax collection.
The GAT is neither supposed to be collected on the net asset amount declared in a company’s balance sheet nor is it to be imposed on the total asset amount. Instead, the levy is imposed on the gross level of total (or fixed) assets of a particular company. Moreover, the levy is not expected to be collected on the net liability either.
The implementation of GAT is nothing new for Pakistan’s corporate sector. Back in 1991 (between June 30, 1991 and June 30, 1992), GAT was imposed and the collections were received on the value of (fixed) assets of the companies. As mentioned before, the tax was a one-time levy, payable by a company, as defined in the Companies Ordinance, 1984, on the value of its ‘fixed’ assets as per the balance sheet figure.
However, the then gov’t had also defined the slabs for imposition of this tax. As some define, one of the forms of GAT can be minimum tax but on gross assets basis. Back in 2009, the IMF also mentioned such measures as Carbon Tax, GAT and Wealth Tax in its country report on Pakistan following first review under the Stand-By Agreement (SBA).
Asset tax in the works
