Impact of budget on different sectors.

Byline: SHABBIR KAZMI

In the last few weeks, the government has significantly reduced fuel subsidies, while passing legislation to reform state-owned entities and set up an Export-Import Bank to take over the SBP's refinance facilities. Efforts to recapitalize two private sector banks have also accelerated. These measures are part of the structural benchmarks agreed upon with the IMF in February. The FY23 Budget is part of the same chain.

Some aspects will be challenging, for instance meeting the large target for petroleum levy will likely be politically difficult, but it is heartening to note the finance minister stated in his speech that the government is not afraid of taking tough decisions. There are also risks to headline macroeconomic targets but in its broad brushstrokes, the FY23 budget is a responsible one and should satisfy the IMF. This should help successfully complete the pending 7th review of the IMF program.

Banks - Negative

Tax rates on Banks have been increased from 39% to 42% from tax year 2023 onwards (CY2022). Super tax has been abolished and it has been replaced by Poverty Alleviation tax of 2%. Tax rates on income from government securities for banks having gross ADR of above 50% will be taxed at 42%.Tax rates on income on government securities for banks having gross ADR of less than 40% will be taxed at 55%. Tax rates on income on government securities for banks having gross ADR of between 40-50% will be taxed at 49%. Enhanced rates on government securities income will be applicable from tax year 2022 onwards. Analysts believe that this will result in sharp increase in effective tax rate and will impact profitability by 15% depending upon banks ADR. Analysts estimated earnings growth for banks of 30% for 2022 which will be impacted.

Fertilizers - Neutral to Positive

The government has increased GST on all fertilizers from 2% to 10% which will increase Urea and DAP prices by Rs142/bag and Rs820/bag, respectively. The increase in prices will easily be passed on to consumers, in our view. Analysts believe this will be positive for sector as it will result in lower piling up of sales tax receivables as they are paying 5-17% sales tax on input/raw material.

The government has increased GST on feed gas used for fertilizer from 5% to 10%. Analysts consider this will be cash flow positive for sector as it will result in no piling up of sales tax receivables from this segment.

Government has increased GST from 5% to 10% on...