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Pakistan Budget Review

Mapping Out Growth Ahead

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Budget Review FY17

Table of Contents
Pakistan Economy • Budget neutral for PSX 18

• Moving Forward Towards Growth 3 Key Sectors

• Budget at a Glance • Banks – Neutral to Negative 20
4
• Fertilizer – Positive 21
• Hitting All Avenues For Revenues 5
• Oil and Gas – Neutral 22
• Debt, Defense and Grants Driving Expenditure 6
• Cement – Neutral 23
• Development – Ready For Take-Off 7
• Power – Neutral 24
• Subsidies 8
• Autos – Neutral 25
• Financing Of Fiscal Deficit 9
• Textile – Positive 26
• Budgetary Trends 10
• Telecom – Neutral 27
• Key Income Tax Measures 11
• Other Sectors - Mixed 28
• Key Relief Measures 12

• Sales tax, FED and Custom Duties 13

Capital Market
• PSX: Key Measures 15

• Details of CGT, Dividend and Bonus Tax 17

2
Budget Review FY17

Moving Forward Towards Growth

Following up on the success in substantial tax collection enhancement witnessed during the FY16, government has set eyes on another round
of optimistic revenue target of PKR 3,956mn (up 16% YoY), which with an anticipated GDP growth of 5.7% will boost Tax-to-GDP to 12.9% (up
from 12.6% in FY16). It is pertinent to mention, though, that the budgeted growth in tax revenues is anticipated to be driven by Indirect Taxes;
Duties, GST, and FED (adding up 57% of total tax revenues). On expenditure front, govt. plans to increase both current and development
spending taking the total budgeted outlay to PKR 4,895mn (10% growth YoY). While govt.’s envisaged fiscal gap projected at 3.8% (down from
4.3% FY16) may be too good to be true, with a possible cut in outlay in the prospective should compensate for any downside in tax collection.

Aggressive Taxation to Provide for Fiscal Consolidation

As anticipated, the Budget for FY17 came out with an aggressive taxation regime focusing on (i) heftier custom duties, sales tax, and federal
excise duties, (ii) effort towards widening of tax net – where non-filers will be penalized with higher taxation on CGT, dividend income, and
insurance premium, as well as (iii) certain market related sources (Super Tax, REIT related, etc). All such sources are expected to bring the Tax-
to-GDP up to a promising, over a decade high of, 12.9% providing cushion for fiscal consolidation. On the brighter side of things, there are a
few key tax relief measures to provide impetus to the hurting exports; mainly agri and textile, which in turn may provide for an improved CA.

Accelerated Expenditure – To Be Up 10% YoY

Current Outlay – Current portion of expenditure is budgeted at similar levels as FY16 of 78% of total outlay, with a soft growth of 7% YoY.
However, considering the revised FY16 current outlay which turned out to be substantially higher (80% of total outlay), a similar story could
enfold during FY17 – on the back of higher than expected domestic/foreign debt servicing and an ever increasing defense budget (~47% and
~22% of current expenditure, respectively).
Development Outlay – Driving the growth of total outlay, development outlay is budgeted to grow at a whopping 20% YoY to PKR 1.1tr
compared to PKR 0.9tr mn FY16. The one major component of development outlay stands the Federal Public Sector Development Program
(PSDP) at PKR 800mn (with an additional PKR 875mn under provincial) which is discussed later in more detail. Although, the hike in outlay is
deemed to hinder fiscal consolidation, the resultant resolution of structural inefficiencies, energy shortfall, and lack of effective infrastructure
will serve for aggressive GDP growth anticipated with the completion of CPEC.

3
Budget Review FY17

Budget at a Glance
Revised fiscal deficit of FY16 stood at 4.3% of GDP, in line with initially budgeted number at 4.3%. For FY17, the government is targeting a 3.8%
fiscal deficit of PKR 1.3trn. This is expected to be achieved through a combination of removal of tax exemptions, marked reduction in subsidies,
and an upbeat approach to bringing more economic resources under the tax net, in our view.

Budget FY17 at glance

Exhibit: Key Highlights as % of GDP
 Total Outlay is projected at PKR 4.9trn, up by 9.3% YoY.
(%) Fiscal Deficit Total Expenditure Total Revenue
 Tax Revenues are projected at PKR 4.0trn, which is 15.7% higher
than revised tax collection of PKR 3.4trn for FY16.
3.8
 Current Expenditures are estimated at PKR 3.8trn, relatively revised FY17B 14.6
14.7
of PKR 3.6trn last year (up 6.8% YoY), 11% of which has been
4.4
allocated for debt repayments and 22% for defense, while 4%, or FY16R 15.1
PKR 141bn, is set aside for subsidies (all inclusive), way lower than 14.6
last year’s revised amount at PKR 197bn. 4.3
FY16B 14.5
 Public Sector Development Program expenditure is estimated to go 14.1
up by 20.2%, to PKR 1.7trn (Federal PKR 800, Provincial PKR 875bn). 5.3
FY15A 19.7
 Provincial Surplus is projected to grow by 14%, to PKR 339bn. 14.4
 Total Fiscal Deficit for FY17 is projected at PKR 1.3trn, or 3.8% of the 5.5
FY14A 19.8
GDP, compared to PKR ~1.3trn, or 4.4% of the GDP for revised
14.3
target of FY16.
- 5.0 10.0 15.0 20.0
 In order to meet the expenditure domestic borrowing has been
Source: MoF, AHL Research
estimated at PKR 1,042bn, or 82% of total deficit financing.

4
Budget Review FY17

Hitting All Avenues For Revenues

Revenues
The government has set another optimistic tax revenue target of PKR 3.96trn for FY17, which is higher by 16% YoY when compared to revised
FY16 collection of PKR 3.42trn. Basis of higher growth in revenues are expected to be a) 18% YoY increase in direct taxes to PKR 1.6trn, b) 16%
YoY increase in indirect taxes to PKR 2.1trn. Non-tax revenue is targeted at PKR 0.96tn, up by 5% YoY.

Aggressive Taxation Regime

Exhibit: Revenue Break-up
 The government has set a tax collection target of PKR 3.96trn for
FY17, which is 16% YoY higher when compared with the revised Tax Revenue Non-Tax Revenue
FY16 collection target of PKR 3.42trn. 100%
 This growth in tax collection is estimated on the back of 23% 21% 21% 20%
29%
substantial 18% YoY increase in direct taxes to PKR 1.6trn with a 80%
major push from 18% YoY growth in income tax to PKR 1.5trn.
60%
 Indirect taxes are projected to grow by 16% YoY to PKR 2.1trn,
with sales tax contributing almost 70%, followed by an increased
40% 77% 79% 79% 80%
19% contribution through custom duties. 71%

 Non-tax revenues are targeted at PKR 0.96trn (PKR 0.91trn in 20%

FY16) on account of anticipated higher receipts from property
and Enterprise. 0%

FY16B
FY14A

FY15A

FY16R

FY17B
 Tax-GDP is estimated at an over-decade high of 12.9% for FY17
against a revised 12.6% in FY16.
Source: MoF, AHL Research

5
Budget Review FY17

Debt, Defense and Grants Driving Expenditure

Expenditure
The govt. has targeted total expenditure for FY17 at PKR 4,895bn up by 10% over FY16 divided into Current expenditure of 78.5% and
development expenditure of 21.5%.

Higher growth demands higher expenditure Exhibit: Key Expenditure Break-up (PKR trn)

 Current expenditure – The two major heads here are General

Subsidies Defense Debt Servicing
public service PKR 2,707bn up by 5.8%. The bigger chunks in this
head are of debt servicing and transfers (grants). Secondly, 2.5
defense spending is set to rise by 11% accounting for 22% of
current expenditure.
2.0
 Subsidies – Taking a strong stance in pushing various industries
to fend for themselves, the govt. has reduced the total subsidies
to PKR 140bn declining by 28%. 1.5

 Development – FY16B total was reduced by 9.3% and for FY17 it

has been increased by 19.5% 1.0

0.5

-
FY13 A FY14 A FY15 A FY16 R FY17
Source: MoF, AHL Research

6
Budget Review FY17

Development – Ready For Take-Off

Public Sector Development Program/CPEC
PSDP utilization has consistently risen over the past few years. The landmark agreement of CPEC has been a testament to gov’ts drive towards
developing a strong infra-structure base.

PSDP Rising
 FY17 budget has set a staggering PKR 1,675bn up by 20.2% from
Exhibit: Historical PSDP trend (PKR bn)
PKR 1,384bn last year.
 Out of which the provinces have been allocated PKR 875bn while Federal PSDP Federal PSDP YoY Change (RHS)
the federal PSDP is set at PKR 800bn. 1,800 45%

1,600 41% 40%

Public Sector Development Expenditure 1,400 35%
PKRbn FY16B FY16R FY17B %YoY 1,200 875 30%
Federal 700 661 800 21% 732
1,000 25% 25%
- WAPDA 112 121 130 8%
800 20%
499 20%
- National Highway Authority 160 178 188 6% 431
600 15%
Provincial 814 732 875 19% 372
400 14% 800 10%
Total PSDP 1,514 1,394 1,675 20% 661
5% 489
200 435 5%
PSDP %age of GDP 4.9% 4.7% 5.0% 324
- 0%
Source: Ministry of Finance FY13A FY14A FY15A FY16R FY17B

Source: MoF, AHL Research

7
Budget Review FY17

Subsidies
Synopsis
Subsidies, once again remained matter of contention for the economy in FY16 surpassing the initial estimates of PKR 138bn to PKR 197bn for
FY16. The gov’t is targeting subsidies at PKR 141bn for FY17, a significant decline of 28% YoY. Moreover, energy reforms are underway with the
announcement of CPEC and gov’t key power projects, we view that energy shortfall to fade away with gradual additions till 2019.

Higher growth through changing energy mix

 Power subsidies – The government has announced a 31% YoY
Exhibit: Subsidy Break-Up
decline in power subsidies to PKR 118bn against the revised target of
PKR 171bn for FY16. The cut is primarily on account of lower oil which
lower down avg. cost of generation and help to narrow down the FY17B 5.2%
price gap between power generation/distribution cost and selling 10.9%
price. 7.8%
5.1%
 Path to self sufficiency in energy - Henceforth, in order to meet up
the current and growing energy demand, the government is
16.1% FY16R
aggressively pursuing relatively cheaper and more efficient fuel-based 27.2%
projects (Hydel, coal and LNG) to fill-up the supply gap. This will be 59.9%
achieved through, setting up coal based power plant (8,733 MW till
2019), LNG based power plant (3,500 MW), LNG imports from Qatar 67.9%
(currently 400mmcfd), setting up LNG terminals with capacity of
~1,000mmcfd, and finally curtailing subsidies to reduce fiscal burden
through tariff rationalization.

 Other Subsidies The budget FY17 also revealed the government WAPDA KEL PASSCO Others
lowered down other subsidies, ex-power, with 11% YoY decline to PKR Source: MoF, AHL Research
20bn compared to last year’s PKR 18bn.

8
Budget Review FY17

Fiscal Deficit Financing

Internal and External Sources for Fiscal Financing
Financing of fiscal burden is geared more towards mobilizing domestic sources, with an expected domestic borrowing of PKR 1.04tr, a hefty
82% of the anticipated FY17 deficit, compared to only PKR 0.23tr from external sources. With such a hefty domestic financing in the cards, there
may seem to be a possibility of a ‘crowding out effect’ in turn hurting private sector credit offtake. However, with an estimated PKR 2.45tr PIB
maturity scheduled in FY17, there should be ample liquidity in the market to provide for the anticipated industrial growth. We think this
financing mix would provide just about the right balance to support long-term objective of sustained economic growth.

Exhibit: Fiscal Deficit and Financing (PKR bn)

 For FY17, deficit financing is projected to be skewed more
towards mobilizing domestic sources worth PKR 1,042bn (82% of Domestic Borrowing Foreign Borrowing
anticipated FY17 deficit of PKR 1,276bn, versus 74% in FY16). Fiscal Deficit (RHS)
1,600 -1,000
 SBP financing is expected to be at PKR 453bn, whereas Non-Bank
1,400
financing is expected to be around PKR 589bn.
1,200
 Overall gross external sources are expected to be PKR 820bn with -1,200
1,000
scheduled repayments worth PKR 585bn during the year. Majority
of the foreign financing is expected to come from long term loans 800
(PKR 444bn). 600
-1,400
 Although the interest rate environment stays in favor of the govt., 400
the amount of domestic debt servicing is projected to be an 200
increased to PKR 1.25tr (up 4% YoY) compared to PKR 1.20tr FY16.
0 -1,600
FY14A FY15A FY16R FY17E

Source: MoF, AHL Research

9
Budget Review FY17

Budgetary Trends
Exhibit: Budgetary Highlights
Exhibit: Historical Tax Revenues as % of GDP
PKR bn FY15A FY16B FY16R FY17B
(%)
11.6 11.8
Net Receipts 2,392 2,463 2,481 2,780 12.0 11.0 11.1
Total Revenue 3,931 4,313 4,333 4,916 10.5 10.1
- Tax Revenue 3,018 3,418 3,420 3,956
9.0
- Non-tax Revenue 913 895 913 959
7.5
Less: Provincial Share 1,539 1,849 1,852 2,136
Total Expenditure 5,388 4,451 4,479 4,895 6.0

FY16B
FY14A

FY15A

FY16R

FY17B
Current Expenditure 4,425 3,482 3,600 3,844
- Debt Servicing 1,304 1,596 1,633 1,804
- Defence 698 781 776 860 Source: MoF, AHL Research
Consolidated Fiscal Balance -1,451 -1,328 -1,278 -1,276
Exhibit: Historical Fiscal Deficit as % of GDP
(%)
As a %age of GDP 6.0 5.5 5.3
Total Revenue 14.4 14.1 14.6 14.7 5.0 4.3 4.3
Tax Revenue 11.0 11.1 11.6 11.8 3.8
4.0
Non-tax Revenue 3.3 2.9 3.1 2.9 3.0
Total Expenditure 19.7 14.5 15.1 14.6 2.0
Current Expenditure 16.2 11.4 12.2 11.5 1.0
Fiscal Balance -5.3 -4.3 -4.3 -3.8 -

FY16B
FY14A

FY15A

FY16R

FY17B
Source: Ministry of Finance, AHL Research

Source: MoF, AHL Research

10
Budget Review FY17

Key Income Tax Measures

 Corporate Tax: Reduction in corporate tax from current 32% to 31% for FY17.
 Group Relief: Restriction of group relief benefit up to the extent of parent company’s holding in the subsidiary (previously 100% group relief could be
claimed); while tax exemption on inter-group dividends for groups claiming this relief has been withdrawn.
 Super Tax: Extension of super tax in case earnings exceed PKR 500mn to FY17.
 BMR: Tax credit for balancing, modernization and replacement extended to Jun’19.
 Stock Exchange Listing: Tax credit of 20% on tax payable for enlistment on stock exchange is being extended to 2 years instead of one.
 New industry and expansion of existing plant: Tax credit on 100% fresh equity investment condition reduced to 70%, for a period of five years from
commercial production. Period of tax credit also being extended to Jun’19.
 IT Services: Tax exemption for export of IT services is proposed be extended till Jun’19.
 Health Insurance: A new tax credit provision @ 5% of tax payable or PKR 0.1mn whichever is less on payment of premium of health insurance.
 Advance Tax: It is proposed that alternate corporate tax may also be made the basis for payment of advance tax.
 Capital Gains Tax: Extension of holding period for capital gains tax on sale of immovable property from two years to five years.
 Tax on Property: Income generation from property (rental) for individuals to be taxed as a separate head (not clubbed with income under other heads) on
amounts exceeding PKR 200K in slabs of 5-20%.
 Turnover Tax: Minimum tax @ 1% of turnover shall be applicable on Individuals and AOPs with turnover exceeding PKR 10mn (previously PKR 50mn).
 Tax Loss: Withdrawal of minimum tax exemption at the rate of 1% of turnover on companies declaring a gross loss.
 Construction Tax: Final tax is being imposed on builders/land developers on the basis of per unit area.
 Tax on Trading: Retention of the existing tax rates on filers trading in securities. However, higher taxes on non-filers to be enforced.
 Foreign produced TV plays and advertisements: Withholding tax of 20% levied on production of foreign commercials either directly or through an agent.
 Insurance premium: Advance tax of 4% and 1% on payment of premium for general and life insurance respectively.
 WHT on dividends: For non-filers WHT hiked from 17.5% to 20.0%.

11
Budget Review FY17

Key Relief Measures

 Zero Rating on Export-Oriented Sectors: Five sectors namely textile, leather, sports goods, surgical goods and carpets to be zero rated.
 Urea price reduction: The price of Urea shall be reduced to PKR 1,400 while DAP to PKR 2,500 with the Federal and Provisional governments paying PKR
36 and 10bn in subsidies, respectively.
 Agricultural Loans: PKR 700bn targeted for agricultural credit in FY17.
 Sales tax on Pesticides: Existing 7% sales tax on pesticides to be eliminated.
 Sales tax refund: Pending sales tax refund which have been approved, to be paid up to 31st Aug’16.
 DLTL Scheme: Textile DLTL scheme to continue in FY17.
 LTFF ERF: Export refinancing rate has been slashed by 0.5% to 3%.
 Textile Machinery: Continuation of SRO 809 for duty-free import of Textile & garment machinery during FY17.
 Concessions on electricity tariffs: For agricultural tube wells, reduction of off-peak rate by PKR 3.5 to PKR 5.35/unit.
 Cost of credit: Deduction on cost of credit mark-up rates of NBP, BOP, ZTBL Punjab co-operative society by 2%.
 Credit Guarantee Scheme: Non-payment for small farmers by guaranteeing up to 50%.
 Silos exemption: Machinery for the development of grain handling including silos to be sales tax exempt.
 Solar Panels: Relief extension on import of Solar Panels till 30th Jun’17.
 Gwadar: Tax exemption for a period of 23 years for supplies made by the businesses operating in the Gwadar free zone, while FED exemption of 40% to be
claimed by Chinese companies and their contractors (including local) at the Gwadar Port.
 Thar Coal: Sales tax on dumper trucks imported for Thar coal to be abolished.

12
Budget Review FY17

Sales tax, FED and Custom Duties

 FED on Cement: Cement is currently charged 5% FED on the retail price. It is proposed to replace the current regime with fixed rate basis and to charge
FED @ PKR 1/kg.
 CD on Paper Products: Increase in existing CD on Semi-Printed and Printed Security paper from 5% to 16%.
 RD on Bead Wire: Removal of Regulatory Duty on Bead Wire for Tyres manufacturers.
 RD on Carbon Steel Strips: Removal of RD on Carbon Steel Strips used by Razor blade manufacturers.
 RD on Milk: Levy of RD of 25% on Powdered Milk and Whey Powder in addition to current CD of 20%. Further, withdrawal of zero-rating on milk and fat
filled milk.
 ST on Sugar: Levy of sales tax on sugar at reduced rate of 8%, whilst removing 8% FED.
 ST on Urea: Levy of sales tax on urea at reduced rate of 5%.
 ST on Steel Industry: Enhancement of fixed rate sales tax on steel sector, melters and ship breakers.
 Dairy and Livestock: Concessions of CD for Dairy, Livestock & Poultry Sectors from 5% to 2%.
 ST on Laptops: Exemption of sales tax on import of laptops and CDs.
 PVC resin: CD on raw material of PVC Resin reduced to 3% from 5%.
 Refrigerator Thermostat: CD on refrigerator thermostat has reduced to 3% from 20%.

13
 Capital Market

Capital Market

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Budget Review FY17

PSX: Key Measures

Key Measures Impact
 For filers there is no change in Capital Gain Tax(CGT), however securities held under 5 years would now to be taxed
at the rate of 7.5%. Previously securities between >2yrs and <4 years were taxed at 7.5% and securities held above 4 Neutral
years were tax free.

 Previously, filers and non –filers were charged CGT at same rate, however from FY17 onwards non -filers will be taxed
at higher rates. The rate for securities held for less than 12 months will be taxed at 18%, securities held for more than
Negative
12 months and less than 24months would be taxed at 16% and lastly securities held for more than 24 months and
less than 60 months would be taxed at 11%

 5% Tax on Bonus shares remains intact Negative

 Tax on dividend income for filers remained status quo, whereas for non-filers, it has been increased to 20% from
17.5%,.
Nuetral

 Previously there was a 20% tax credit on tax payable for new listings for 1 year, however now this limit is enhanced
Positive
to 2-years after listing.

 In line with GoP plans to reduce corporate tax rate to 30% by FY18, corporate tax rate is reduced to 31% in FY17
from 32% in FY16.
Positive

15
Budget Review FY17

PSX: Key Measures

Key Measures Impact
 Super Tax (4% banks, ex-banks 3%) has been extended in FY17 which is valid for companies having bottom line of
PKR 500mn and above, however it is pertinent to mention that for new calculation of Super tax depreciation and
Neutral
business losses have been declared as inadmissible expense. We view the our earnings estimates would take a hit of
4%-7% attributable to Super Tax Impact.

 Dividend received by a company holding REITs, will be taxed at the rate of 25% (no change), for tax year 2016 and
onwards.
Neutral

 Government has kept the tax credit of 10%, under BMR scheme, unchanged. However the scheme has been extend
Positive
for 3 years till Jun’ 2019 since this scheme would expire on June 30th 2016.
 Previously 100% tax credit was allowed, provided 100% equity was raised via issuance of new shares for purpose of
setting up of new industrial unit. However the 100% equity parameter is lowered to 70% threshold, consequently,
the tax credit will move in tandem. The said proposal was expiring in 2016 while the new proposal is due to continue Positive
through to 2019.

 Withholding tax for stock broker has increased to 0.02% in FY17 from 0.01% earlier.
Neutral
 Dividend income received from stock funds, money market funds, RIET schemes etc. will now be taxed at 15%
compared to 10% earlier. While for filers the tax remains unchanged. Neutral

16
Budget Review FY17

Details of CGT, Dividend and Bonus Tax

Exhibit: Capital Gains on Disposal of Securities
FY17
Holding Period FY15 FY16
Filers Non Filers
Less than 12-Months 12.5% 15.0% 15.0% 18.0%
≥ 12-Months < 24-Months 10.0% 12.5% 12.5% 16.0%
≥ 24-Months < 48-Months* - 7.5% 7.5% 11.0%
Future Commodity Contracts - - 5.0% 5.0%
Source: Finance Bill 2016, AHL Research
*In FY17 holding period has been enhanced to 60 months compared to 48 months earlier

Exhibit: Dividend & Bonus Tax

FY15 FY16 FY17
Description
Filers Non Filers Filers Non Filers Filers Non Filers
Dividend Tax 10.0% 15.0% 12.5% 17.5% 12.5% 20.0%
Bonus Tax 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Source: Finance Bill 2016, AHL Research

17
Budget Review FY17

Budget neutral for PSX

Federal Budget FY17 remains Neutral for the equity market. In our view majorly the budgetary Exhibit: Budget Impact on different sectors
measures proposed from the capital market perspective are already priced in. Measures like
Sector Impact
reduction in corporate tax by 1%, increase in capital gain tax and tax on dividend for non-
Market Neutral
filers, extension of super tax were already expected. The only surprise for the PSX investors
was extension of holding period to 5 years for CGT exemption compared to 4 years earlier. Banks Neutral to Negative
Additionally, the only disappointment was retention of 5% tax on bonus shares, we believe Fertilizer Positive
that if this tax was withdrawn it would have been a big trigger for the market. From sectoral Oil & Gas Neutral
perspective, we expect budget to be positive for the following sectors: i) Fertilizers (subsidized Cement Neutral
fertilizer prices) and ii) Textile (grant of zero rated status and lower LTFF rate to 3%). On the Power Neutral
other hand proposal of levying flat 31% corporate tax rate on all sources of income earned by Food and Beverages Negative
insurance companies would bode negatively for insurance sector. The Budget remained
Textile Positive
Neutral for Cement, Banks, Oil & Gas Sector and Power. Importantly, the MSCI
Insurance Negative
reclassification announcement which is due to 14th Jun’16 now remains the key trigger for the
market in the near term . The KSE-100 is currently trading at PER of 9.1x (2016) against Asia Automobile Assembler Neutral
Pac regional average of 14.8x while offering ~5.3% DY versus 2.6% offered by the region. Technology & Comm. Neutral
Chemical Neutral to Positive
Exhibit: Valuation Snapshot (Forward-2017)
Tobacco Neutral
Sector P/E (x) P/B (x) DY (%) ROE (%) Sugar Neutral
Banks 7.2 1.2 7.3 17.0 Source: AHL Research
Fertilizer 10.2 2.4 7.5 25.0
E&Ps 9.1 1.3 5.1 14.5
Cement 9.6 2.0 3.7 21.5
Power 7.3 1.7 5.8 25.0
Oil & Marketing 9.1 1.3 5.1 14.5
Textile 7.1 0.6 4.6 8.0
Autos 7.7 1.7 6.3 23.4
AHL Universe 8.5 1.4 5.7 17.4
Source: AHL Research

18
 Sectoral Impact

Capital Market

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Budget Review FY17

Banks – Neutral to Negative

Budgetary Measures Impact Comment

Given that the banks realized exorbitant capital gains

Another year of the super tax to be
experienced as the govt aims to bump
revenue. Last year 4% was implemented
on CY14 earnings and this year it is to
be continued on CY15 earnings.
(which was a result of adjusting investment strategy
from long term bonds to shorter based tenors)
Neutral to Negative
resulting in bumper earnings; the consequent impact of
super tax will be higher than last year. The impact is
expected to be taken in similar fashion in 2QCY15.

Super Tax Impact

Company
@ 4%
HBL 7.0%
UBL 6.0%
MCB 6.7%
ABL 7.0%
BAFL 6.4%
Source: AHL Research

20
Budget Review FY17
Fertilizer – Positive
Budgetary Measures
Subsidy on urea to the quantum of PKR
36bn for FY17 which would be shared by
federal and provincial government
equally.
Extension of subsidy on DAP fertilizers to
the tune of PKR 10bn
Allocation of PKR 7bn for the import of
urea.
Reduction in corporate tax to 31% from
32%
Continuation of super tax at 3% for FY17
Removal of 7% GST on pesticides.
Impact Comment
Urea prices are expected to reduce by PKR 400/bag. In this regard
our estimates suggest that cash subsidy for urea would be PKR
173/bag, PKR 177/bag reduction would be on account of 12% GST
Neutral to
reduction and local manufacturers would decrease their price by
Positive
PKR 50/bag. Urea offtake is expected to surge significantly in
2HCY16. PKR 50/bag reduction by local manufacturers is expected
to have a negative impact of 8-9% on AHL fertilizer universe.
Neutral to Reduction in DAP prices by PKR 250/bag to PKR 2,500/bag is also
Positive in the offing. Boding well for the offtake of DAP.
We view that these fund would not be utilized amid adequate
Neutral
availability of urea.
Fertilizer manufacturers should have a positive impact of 1% on
Positive
their bottom-line.
Expected to have an average negative impact of 4.5% on AHL
Negative
fertilizer universe.
We believe this will aid in increasing farmer income by improving
Positive
yield per hectare for crops.
21
Budget Review FY17
Oil and Gas – Neutral
Budgetary Measures
Government has budgeted to spend PKR
188bn for construction of National Highways
and PKR 25bn for Gas infrastructure
developments.
The Government expects dividend of PKR
32bn (~PKR 9.6/share), PKR 17bn
(~PKR5.1/share) and PKR 550mn (~PKR
8.7/share) by OGDCL, PPL and PSO
respectively.
The Government in budget for FY17,
extended the super tax of 3% for another
year. The tax is levied on companies having
profitability above PKR 500mn.
The corporate tax rate is reduced to 31% in
FY17 from 32% in FY16.
Impact Comment
The budgeted expenditure of 188bn is higher compared
to revised figure of PKR 178bn last year (up by 6%YoY),
rendering positive impacts for demand of asphalt (APL
Positive
is market leader in the segment). On the other hand the
gas infrastructure development will bode well for
SNGPL and SSGC.
In our view the dividend expectation with regard to PPL
and PSO appears reasonable however the anticipation
Neutral of dividend for OGDC seems optimistic as the budgeted
dividend represents 57% payout ratio, when compared
to our earnings forecast in FY17.
All companies in AHL E&P and OMC universe will be
liable to pay the aforesaid tax, therefore diluting the
Negative
profitability for oil companies.
A lower corporate tax rate will aid the bottom line of
companies operating in OMC sector albeit, this will not
Positive
impact the tax rate of E&Ps as their tax is governed by
their respective PCAs and PSAs.
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Budget Review FY17

Cement – Neutral
Budgetary Measures Impact Comment
PSDP allocation is set at PKR 800bn - 21% higher
With strong correlation of 0.96x between PSDP and
than the revised PSDP allocation of PKR 661bn in
cement demand, we expect the decision to increase
FY16. Total PSDP proposed at PKR 1,675bn , incl. Positive
PSDP allocation would be pivotal in generating cement
provincial share, versus revised target of PKR 1,394bn
demand.
for FY16.
Allocation of fund on key power/infrastructure
development projects including Diamir Bhasha (PKR
32bn), Dasu dam (PKR 42bn) and KLM Motorway Focus on infrastructural development/CPEC would lead
Positive
(PKR 56bn for 4 sections). Additionally, PKR 115bn to stronger cement demand.
has been allocated for China-Pak Economic Corridor
(CPEC)
Any change in FED will eventually be passed on to the
The gov’t proposed change of mechanism of FED on Neutral to end consumer in full or phase-wise manner. However,
cement from 5% of MRP to PKR 1/kg. negative failure of the same would have average negative
impact of 10-17% on AHL cement universe.
Reduction in the import duty for cement plant and Reduction in import duty would be positive for ACPL,
Positive
machinery from 5% to 3%. LUCK and DGKC.
Increase in Custom duty of clinker from 2% to 11% Neutral The import of clinker is negligible.
This should improve the bottomline by 1% for the
Reduction in corporate tax rate by 1% to 31% Positive
sector.
This would have negative impact of 3% on AHL cement
Super tax to continue for FY17 Negative
universe.

23
Budget Review FY17
Power – Neutral
Budgetary Measures
Gov’t has allocated PKR 118bn for power
subsidies (WAPDA and KEL) which is 19%
lower than the revised target of PKR 171bn
for FY16.
Reduction in corporate tax rate from 32% to
31%.
Continuation of super tax at 3% for FY17
Impact Comment
By lowering the subsidy target, the gov’t will pass the
actual cost to end consumers, therefore be able to
Neutral
manage circular debt more effectively, thereby helping
improve IPPs liquidity positions. In turn positive impact
on companies’ payouts.
Power sector is exempt from corporate tax. KAPCO
Positive however, is subject to corporate tax and would have 1%
positive impact on the bottomline.
This would have negative impact of 3% on KAPCO
Negative
alone.
24
Budget Review FY17
Autos – Neutral
Budgetary Measures
Implementation of the Auto Policy (2016-2021)
offering existing OEM’s reduced duty on CKD’s
(localized parts from 50.0% to 45.0% while non-
localized parts shall be imported at 30.0% vs.
32.5% before).
Investors under Greenfield/Brownfield category
permitted to import CKD’s at 25% (localized) and
10% (non-localized) duty.
New tactics to widen the tax bracket and improve
revenue collection include imposition of 3% WHT
on non-filers at the time of leasing vehicles from
banks/leasing companies.
Reduction in corporate tax rate from 32% to 31%.
Extension of super tax of 3% for FY17.
Impact Comment
Assemblers would gain from this development as lower
input costs shall provide an opportunity to either i)
Positive increase margins amid price retention at current levels,
or ii) boost volumes by passing on the benefit to
customers.
While it may take at least a couple of years for new
entrants to establish themselves, existing players have
Neutral
been sent a strong signal to prepare for competition in
the medium-long run.
While this shall not impact Auto Assemblers, however it
Neutral
is a new measure by the gov’t to broaden the tax net.
Lower corporate tax rate would benefit companies
Positive (INDU and PSMC’s earnings to be positively impacted
by ~1.0% on average)
It would have negative impact of 3.0-5.7% on AHL auto
Negative
universe.
25
Budget Review FY17
Textile – Positive
Budgetary Measures
For the FY16-17, Government proposed to grant
zero-rating status for textile sector to raise spirits
of these manufacturing units and to achieve
macro-economic stability.
Government proposed to announce to refund all
the unsettled sales tax whose refund payment
orders (RPOs) has been approved, will be
refunded till 31st Aug,16.
Proposed duty free import on machinery to
continue.
For FY16-17, Government has proposed to reduce
LTFF mark-up rates on export refinance facility to
3%, from 3.5%.
Government proposed to impose Custom duty
(CD) of 6.5% on Synthetic fibers, Synthetic staple
fiber and artificial fiber.
Impact Comment
Textile sector is a major contributor to exports, Zero-
rating on textile exports (will enhance the exports and
Positive
would make them comparative against Vietnam, India
and Bangladesh.
Erratic existing policy on refunds created liquidity
crunch for textile industry and forced companies to
Positive
acquire further loan; This refund policy could alleviate
liquidity problem and reduce finance cost.
Duty free import on machinery could benefit
companies which are going through expansion phase
Positive like NML is commissioning new garment factory and
incentives for others.
This rate cut should entice exporters to avail this facility
Positive
more, thus this could reduce cash flow issues.
Polyester and fiber which is not being produced locally,
Negative This anti dumping duty will increase the cost of ready-
made garments.
26
Budget Review FY17
Telecom – Neutral
Budgetary Measures
Government has allocated PKR 9.52 bn for on-
going projects under the umbrella of Universal
Service Fund, and PKR 11.94 bn for telephone
sevices in rural areas.
Government expects to receive PKR 7bn from
PTCL in the shape of dividends, same as it was
received in last year.
Government has announced a subsidy of PKR
482.5mn for its broadband program.
Impact Comment
In our view, Pakistan Telecommunication Company will
Neutral
be the prime beneficiary of rural telecommunication
development and E-Services (RTEs), being the market
leader in Fixed Line Local Loop (FLL).
This dividend receipt expected in FY17 will lure
Positive investors to the scrip on the back of charming dividend
yield of 12.5% (DPS of PKR 2).
This announced subsidy will aid PTCL to augment its
Neutral
coverage in unserved or emergent areas.
27
Budget Review FY17
Other Sectors - Mixed
Budgetary Measures
Insurance: As per the amendment in Income Tax
Ordinance, 2001 through Finance Bill 2016, the
non filers will now be subject to advance tax of 4%
on general insurance premium while an advance
tax of 1% will be collected incase of life insurance
premium exceeding PKR 0.2mn. Moreover, As per
the amendment in Income Tax Ordinance through
Finance Act 2016, the insurance companies will
now pay uniform corporate tax of 31%.
Food: The zero-rated status of milk and fat filled
milk has been abolished in the budget FY17.
Furthermore a regulatory duty of 25% is levied on
whey powder and powdered milk, in addition to
existing custom duty of 20%.
Steel: Custom duty on CRC raised by 100bps to
11%. Additionally, a fixed rate basis imposition of
sales tax on ship breakers and ship melter’s has
been revised upwards.
Chemicals: Custom duty (CD) on Ethylene, PTA
and PSF has been increased from 2% to 3%, 4% to
5% and 6% to 7% respectively.
Impact Comment
1) The increase in tax burden on non filers may have an
adverse impact on the sales of respective policies. 2) On
the other hand the uniform corporate tax rate of 31% will
Negative increase the effective taxation. Just to recall investment
income represents a major chunk of insurance industry
profitability previously was taxed at lower rates of 7%-
15%.
Abolishment of zero rated status and the levy of 25%
Negative regulatory duty will increase the input cost of milk
producers.
This shall act as another protective measure for the steel
industry from dumped foreign CRC. While a fixed rate
Neutral
charge may scar the steel sector with added cost
pressures.
Increase in CD for PTA and PSF would increase PTA and
PSF primary margins have annualized positive impact of
Positive to ~10% for PTA manufacturer (LOTCHEM) and ~3% for PSF
Neutral manufacturer (IBFL & ICI), respectively. However, increase
in CD for Ethylene has a negative impact for PVC
manufacturer (EPCL).
28
Budget Review FY17

Other Sectors - Mixed

Budgetary Measures
Real Estate: i) Fresh Tax charges of 10% on
immovable property if sales booked within 5
years of acquisition, ii) Twofold hike in
development charges (WHT) on sale and
purchase of property to 1% and 2% (non-
filers 2% and 4%), and iii) Tax imposition on
builders at PKR 210/Sq Ft and on developers
ranging from PKR 20-70 on large Urban
cities, PKR 15-55 on smaller Urban cities and
PKR 10-35/Sq Ft on other cities.
Impact Comment
On numerous occasion the Government has insisted on
expansionary revenue measures hence real estate while
alluring massive investments, shall become a major
Negative
contributor to revenue targets. Additionally, capital
flight may be witnessed from the real estate sector to
capital markets which may well be a positive.

Technology: Export of IT services has been

granted an extension on exemption from Companies exporting IT services and solution (SYS and
income tax till June, 2019 as long as they Positive NETSOL) emerge as the prime beneficiary of the
remit 80% of the proceeds back to Pakistan. extension in sales tax exemption.
Moreover the sales tax on import of personal
computers and laptops.
Sugar: Replacement of existing 8% federal
Substituting a federal excise duty structure with a sales
excise duty on white crystalline sugar, with a
Neutral tax structure is a merely a change in collection
sales tax rate of 8% through an amendment
mechanism after 18th Amendment.
in Sales Tax Act 1990.

Personal Care Products: The regulatory

duty of 17.5% on carbon steel strips has
been removed.
The strips are used as raw material for razor blade
Positive
manufactures (TREET), removal of RD will lower the cost
of input.

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Budget Review FY17

Disclaimer
Analyst Certification: The research analyst(s) is (are) principally responsible for preparation of this report. The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject
security (ies) or sector (or economy), and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in
this report. In addition, we currently do not have any interest (financial or otherwise) in the subject security (ies). Furthermore, compensation of the Analyst(s) is not determined nor based on any other service(s) that AHL is
offering. Analyst(s) are not subject to the supervision or control of any employee of AHL’s non-research departments, and no personal engaged in providing non-research services have any influence or control over the
compensatory evaluation of the Analyst(s).

Equity Research Ratings

Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as Dec’16 for Target Price. In addition, return excludes all type of taxes. For more details kindly refer
the following table;

Rating Description
BUY Upside* of subject security(ies) is more than +10% from last closing of market price(s)
HOLD Upside* of subject security(ies) is between -10% and +10% from last closing of market price(s)
SELL Upside* of subject security(ies) is less than -10% from last closing of market price(s)
* Upside for Power Generation Companies (Ex. KEL) is upside plus dividend yield.

Equity Valuation Methodology

AHL Research uses the following valuation technique(s) to arrive at the period end target prices;
 Discounted Cash Flow (DCF)
 Dividend Discounted Model (DDM)
 Sum of the Parts (SoTP)
 Justified Price to Book (JPTB)
 Reserved Base Valuation (RBV)

Risks
The following risks may potentially impact our valuations of subject security (ies);
Market risk
Interest Rate Risk
Exchange Rate (Currency) Risk

This document has been prepared by Research analysts at Arif Habib Limited (AHL). This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for
distribution to the clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The information contained herein is based upon
publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In
particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can be no assurance
that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make modifications and alterations to this statement as may be
required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to
provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone
be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an
independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of
such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report.

© 2016 Arif Habib Limited: Corporate Member of the Pakistan Stock Exchanges. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written
consent of Arif Habib Limited.

30
Budget Review FY17

Contact

Shahid Ali Habib Chief Executive Officer shahid.habib@arifhabibltd.com +92 -21-3240-1930

Research Team
Shahbaz Ashraf, CFA Head of Research Strategy, E&Ps & OMCs shahbaz.ashraf@arifhabibltd.com +92-21-3246-2589
Tahir Abbas AVP- Senior Investment Analyst Fertilizer, Cement & Power tahir.abbas@arifhabibltd.com +92-21-3246-2589
Syed Fawad Basir AVP- Investment Analyst Banks fawad.basir@arifhabibltd.com +92-21-3246-2589
Rao Aamir Ali Investment Analyst Power & Chemicals amir.rao@arifhabibltd.com +92-21-3246-2589
Syed Shiraz Zaidi Investment Analyst Banks & Economy shiraz.zaidi@arifhabibltd.com +92-21-3246-1106
Waleed Rahmani Investment Analyst E&Ps & OMCs waleed.rahmani@arifhabibltd.com +92-21-3246-1106
Misha Zahid Investment Analyst Autos & Steel misha.zahid@arifhabibltd.com +92-21-3246-1106
M. Hasnain Madni Officer- Database Database hasnain.madni@arifhabibltd.com +92-21-3246-1106

Equities Sales Team

Azhar Javaid VP- International Sales azhar.javaid@arifhabibltd.com +92-21-3246-8312
Usman Taufiq Ahmed AVP- International Sales usman.ta@arifhabibltd.com +92-21-3246-8285
M. Yousuf Ahmed SVP- Equity Sales yousuf.ahmed@arifhabibltd.com +92-21-3242-7050
Syed Farhan Karim VP- Equity Sales farhan.karim@arifhabibltd.com +92-21-3244-6255
Farhan Mansoori VP- Equity Sales farhanmansoori@arifhabibltd.com +92-21-3242-9644
Afshan Aamir VP- Equity Sales afshan.aamir@arifhabibltd.com +92-21-3244-6256
Atif Raza VP- Equity Sales atif.raza@arifhabibltd.com +92-21-3246-2596
Furqan Aslam AVP- Equity Sales furqan.aslam@arifhabibltd.com +92-21-3240-1932

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