Equity market braces for neutral to negative impact
The federal government whereas has unveiled Its proposed fiscal plan for Financial Year 2014-15, the equity analysts foresee a “neutral to negative” impact thereof on the country’s booming stocks market.
The market observers believe that the government’s major positive incentive for stock investors in the current budget was relaxing the Capital Gains Tax (CGT).
“Otherwise bringing foreign institutional investors under tax umbrella would be the deepener for the market,” viewed the analysts.
They said the imposition of tax on issue of bonus shares was expected to restrict the investors’ interest in the bonus issuing companies.
The analysts at Shajar Research say Budget FY15 came as a “little surprise” to the stock market on the back of certain unexpected developments.
Though, the increase in the holding period and rate on CGT comes in line with market expectation, market participants are likely to react adversely to the imposition of additional 5 percent advance tax on dividend, five percent on bonus shares and foreign institutions brought under withholding tax regime, they said.
Also, the analysts warned, the scheduled reduction in the corporate tax rate to 33 percent may also fail to create excitement at the local bourse.
“The imposition of Alternative Corporate Tax (ACT) at 17 percent may turn out to be a non-event for major heavyweights, but cannot rule out the impact on the smaller sectors,” they opined.
The Topline Researchers view that the budget was no surprise for the capital market in terms of increase in CGT as the same was widely expected.
However, increase in tax on dividend income and imposition of 5% tax on bonus shares is negative for the market since it would discourage companies from paying it.
Where 1% reduction in corporate tax for non-banking companies was envisioned, reduction of minimum tax on turnover for OMCs, refineries and gas distribution companies is a pleasant surprise and will enhance earnings of entities within these sectors.
Regarding the imposition of ATC, those companies reporting effective tax rate of less than 17% would have to pay higher tax hence reducing their reported earnings.
“Lastly, although ineffective, we regard removal of income support levy as a good omen,” said the analysts.
They maintained a positive stance on the stock market which is trading at FY15 estimated PE of 7.7x and dividend yield of 6%.
In their future outlook, the Shajar analysts said the imposition of new taxation measures might create short-term pressures in the market.
However, they held on to the notion of economic revival based on the premises of stable economic and political environment.
The new budget envisages for the stocks market: A CGT, which was supposed to be increased from 10% to 17.5%, restricted to 12.5% for securities held up to one year.
Ten percent for the securities held between 1-2 years and no CGT on holding of over 2 years.
Corporate tax rate for non-banking companies has been reduced from 34% to 33%, keeping in view Govt.’s plan to bring it down by 1% annually to 30%.
Companies shall now be taxed at 17% Alternative Corporate Tax (ACT) or corporate tax whichever is higher on accounting income.
Minimum tax on turnover reduced from 1% to 0.5% for Oil Marketing Companies (OMCs), Oil refineries, SSGC and SNGP (for cases where annual turnover exceeds Rs1bn), and PIA.
Withholding tax (WHT) on dividend income increased to 15% from 10%. The additional 5% tax is adjustable for those who file tax returns.
Five percent tax imposed on the value of bonus shares determined on the basis of day-end price on the first day of book closure shall be charged by the issuer.
Income support levy, previously charged at 0.5% of value of net movable wealth exceeding Rs1mn, has been removed.
This was imposed in the last budget however court stay was taken against it.
The budget also envisages the imposition of WHT on Foreign Institutional Investors that do not pay CGT and do not file tax returns; details on this are awaited.
The debt securities have been included in the definition of ‘securities’ for the purpose of deduction of CGT. However, companies shall be excluded from such tax.
The rate of tax on profit on debt also increased to 15% from 10% on interest income above Rs500,000 for non-filers.
The KSE-100 is trading at around PE of 8.8x and offering attractive Dividend Yield of 5.05% on 2014 earnings estimates.
