Karachi, June 17, 2022 (PPI-OT): Dissecting the Rs9trn revenue target

In today’s note, we discuss the ambitious Rs9trn revenue target the government has set for FY23, where concerns on meeting the target have begun to simmer over higher targets of PDL and GIDC along with the expected slowdown in economic activity.

We believe the target can be met even with relative slowdown with support from (1) growth from additional taxes announced on the elite and retailers, (2) PKR depreciation increasing duties and GST on imports and (3) better management of retail fuel prices, under IMF program.

Levies and taxes collection from POL products could be a determining segment this year given IMF focus on the same. With a low base in FY22, Sales tax on POL products levied even for half of FY23 could provide cushion to any slippages in other segments, while any softening in global oil prices could create room for an earlier application of the tax.

Additional revenue collection targeted at Rs1.7trn

In today’s note, we dissect some of the key revenue streams announced in the Federal Budget FY23 and the potential negative and positive surprises in the same in-line with the current macro landscape of the country.

The government has announced a budget of Rs9trn revenue collection, up 23% YoY (+RS1.7trn) from the revised FY22 targets, out of which contribution from tax revenue remains close to 80%, with a target of Rs7trn, up 17% YoY (+Rs1trn) and the remaining from non-tax revenue (+52% YoY, +Rs700bn). From the FBR collection, contributions of various revenue streams also reflect no change as compared to FY22R. The three key streams are (1) Sales tax (44% of tax collection), (2) Income tax (37% of tax collection) and (3) Custom Duties (14% of tax collection).

The Budget announcement reflected the government’s strategy of fiscal consolidation, where the tax increases could be followed by depressed economic activity. The additional tax measures have begun to worry some quarters of the market regarding slippages on the fiscal side in FY23 over expected slowdown in economic activity, in addition to the high jump targeted in PDL and GIDC.

For perspective, we estimate the government’s underlying assumption of organic growth in the tax collection is Rs600bn (0.77% of GDP) out of the total additional Rs1.7trn (2.17% of GDP) incremental revenue collection.

Non-tax revenue segment to be a blanket burden

The Non-tax revenue segment is an area that has room for negative surprises with its ambitious target at Rs2trn, up 52% YoY. The two main sub-segments that are worrisome at this point in time are:

1. PDL budgeted at Rs750bn (+6x YoY) and

2. GIDC budgeted at Rs200bn (+8x YoY), accounting for almost half of the non-tax revenues.

Both segments cumulatively are estimated to collect Rs160bn in FY22. Though assuming no change in the ongoing stay on GIDC collection would only bring a shortfall in total revenues by 2%, any delay in imposition of the Petroleum Levy would have a bigger impact on revenue shortfall. For perspective, the amount Rs750bn implies Rs30/ltr PDL on MS and HSD from 1 July, 2022 on a similar consumption level of fuel as FY22.

While resumption of PDL may bring a negative impact on POL consumption, the higher PDL is likely to bring a snowball impact on prices of food, clothing etc, leading to controlled spending by the average population. Hence, not only the PDL collection may fall short over decline in POL demand, but decline in consumer activity over higher prices could also take a hit on Sales tax collection (one third of total revenue target).

Additional tax measures can bring positive surprises

In order to achieve fiscal discipline, the government has proposed to increase taxes on many fronts, which have already been much talked about, to achieve its aggressive revenue target. Out of those, we believe:

Tax measures such as fixed tax on the electricity bills of Retailers, various changes in capital gains taxes on properties and withdrawals of tax incentives proposed in the Finance Bill will contribute to revenue growth this year,

Despite target of lower imports, likely appreciation of US$ against PKR is expected to keep the growth momentum on custom duty and sales tax intact as well,

Taxes on ‘luxury lifestyle’ including capital value tax, poverty alleviation tax etc. is also expected to contribute well to the overall double-digit growth of tax collection.

Though it is too soon to quantify these measures in tax collection, we highlight that a key assumption here is the complete enforcement of the new taxes and systems in place avoiding tax evasions.

Sales tax on POL products can save the day

Sales Tax collection from the POL products can be the bonus segment this year where the total Sales Tax target increment set at Rs440bn, can turn out to be an underestimated target in the scenario of softening international oil prices.

Every additional month of 17% GST on MS and HSD collects taxes of close to Rs100bn on current prices as compared to cumulative Rs250bn – Rs300bn collected in FY22 (JS estimates). Even if we assume a 20% – 25% drop in POL prices, levying 17% GST on the same for 8 months in FY23 would suffice to meet the Sales Tax target of FY23, while GST beyond this time period may also support other segments that fall short of the given target.

Some reforms announced, some under way

A government facing elections in maximum of 18 months and looking to resume the IMF program, as soon as it can, has taken the unenviable task of levying higher tax measures in Federal Budget FY23, which we believe would assist in meeting next year’s revenue target. However, it looks like the market is giving more weight to IMF’s nod than to measures already announced by the policy makers.

Until clarity on IMF’s approval on the Budget obtained, we recommend fishing high D/Y plays in the upcoming high inflationary environment. For the longer-term, our liking for mid-tier banks, E and Ps and fertilizers is intact where a combination of growth stories with dividend yields is on offer. Event-based themes in the E and P and OMC sectors, related to resolution of circular debt, should also be kept on radar.