The Pakistan Stock Exchange (PSX) is bracing for a potential downturn following the announcement of the ‘neutral to negative’ federal budget for the fiscal year 2024. Experts believe that the budget, which deviated from the context of the International Monetary Fund (IMF) loan program, could result in increased selling pressure on the PSX if the government and IMF part ways, although the likelihood of such an outcome remains low, they said.

During the budget presentation in the national assembly on Friday, Finance Minister Ishaq Dar proposed several tax measures that are perceived as negative for the stock market. These measures include a 10% tax on bonus shares, the reintroduction of a 0.6% tax on cash withdrawals for non-filers, and an increase in the super tax rate by six percentage points to 10%, with retrospective impact.

While some of these measures were already anticipated by traders and investors, who had factored them into their expectations, the imposition of a tax on bonus shares is expected to discourage companies from issuing them, potentially leading to selling pressure from investors. As a result, market analysts suggest that the PSX will likely remain neutral to negative in the coming days.

Despite the budget announcement, the PSX closed higher on Friday, registering a 0.52% increase and reaching 41,940 points. However, this upward movement is seen as temporary, considering the prevailing selling pressure in the market. Experts believe there is limited room for extensive selling, as investors had already purchased shares in anticipation of bonus shares and dividends.

Looking ahead, analysts do not expect an influx of buying activity in response to the budget. Additionally, the State Bank of Pakistan (SBP) is scheduled to announce its monetary policy on Monday, and it is widely anticipated that the key policy rate will remain unchanged at the record high of 21%. This event is also expected to have a neutral to negative impact on the market.

Topline Research, in its analysis of the budget’s impact on the PSX, highlighted several factors. The re-imposition of a 10% final withholding tax on bonus shares is expected to discourage companies from issuing them, which could affect market trade volume and be perceived as negative. On the other hand, the reduction of minimum tax liability on turnover from 1.25% to 1.0% is seen as positive for listed firms, especially for loss-making and low-margin companies.

The decision to increase the super tax to 10% from 4% on companies, along with the addition of three new income slabs on income above Rs150 million, is considered a neutral event for the market. Surprisingly, the government did not impose taxes on reserves or retained earnings, which is expected to have a neutral impact.

However, the government’s provision for imposing up to a 50% additional tax on unexpected income for the preceding five tax years stands as a negative factor for the market. On the positive side, the inclusion of one more Active Pharmaceutical Ingredient (API) and three drugs in the existing duty-free regime is seen as an incentive for the pharmaceutical sector.

Furthermore, the continuation of the concessionary fixed tax rate of 0.25% for IT and IT-enabled services exports for the tax years 2024, 2025, and 2026 is regarded as a positive move. Additionally, the extension of the exemption for one year on profits and gains from the sale of immovable property or shares of special purpose vehicles to any type of Real Estate Investment Trust (REIT) scheme until June 30, 2024, is considered a positive development.

However, the re-imposition of a 0.6% advance adjustable withholding tax on non-Active Taxpayer List (ATL) persons on cash withdrawals is seen as negative for the market.

With the combination of the budget’s tax measures and the upcoming monetary policy announcement, the PSX is bracing for a challenging period ahead. Investors will closely monitor market dynamics and assess the implications of these decisions on their investment strategies in the coming weeks.

Published in The Express Tribune, June 10^th, 2023.

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