Karachi, June 22, 2022 (PPI-OT): Key tax changes likely to conclude IMF talks
The most awaited IMF deal seems to be witnessing a breakthrough as recent news flows suggest the Fund and government agreeing to changes in tax measures proposed in Federal Budget FY23.
The key changes surfaced so far have been additional tax measures of Rs422bn through higher Poverty Alleviation tax charge, higher tax on salaried class and other measures.
On the other hand, the PDL target (under non-tax revenue) may reduce from Rs750bn to Rs550bn, with a gradual increase in the levy over time, slightly altering the pace of expected inflation growth in the coming months, however maintaining the FY23 average close to 18.5%.
As data reflects a strong correlation of levels of import cover and market multiples, we expect an agreement on IMF’s disbursement to improve the country’s import cover, compounded by ongoing corrective measures, leading to market participant pricing in the on-going corporate profitability and dividend pay outs.
Progress emerges on IMF talks
The most awaited IMF deal seems to be witnessing a breakthrough as recent news flows suggest the Fund and government agreeing to the proposed changes in the Federal Budget FY23. The government’s tax revenue target is reportedly revised up by Rs422bn from the previous target to Rs7.4trn, with an unchanged Primary Surplus at 0.2% of GDP.
The next course of action would now be sharing of the Memorandum of Economic and Financial Policy (MEFP) draft and finalization of monetary targets with the State Bank of Pakistan (SBP). This may also include discussions over the direction of the ongoing monetary tightening, where our expectations are a 100bp Policy Rate hike in the 7th July Monetary Policy announcement.
Potential tax changes
Poverty Alleviation tax in slabs: The Poverty Alleviation tax, previously announced at 2% on individuals and corporates earning Rs300mn/annum or more would likely be applied on a slab-based working now, albeit, on Tax Year 2022 profits. The slabs may start form Rs150mn, with the tax charge starting from 1% (refer to table). We expect this change to impact all companies under our coverage, trimming earnings by 5.6% now, as compared to 2.8% previously. We have assumed the Poverty Alleviation tax on a recurring basis in our projections.
Lower Corporate Tax on Banks: Other news flows also suggest corporate tax of the Banking sector to be revised down to 42%, from 45% announced in the Budget. Our calculations suggest any incentive of this quantum would not be enough to offset the potential higher Poverty Alleviation tax, however would provide some support as compared to other sectors.
PDL target revised downward: Despite increase in tax revenue target, a key change is the downward revision in the PDL, a non-tax revenue, to Rs550bn, from Rs750bn announced in the Federal Budget FY23. The strategy of resuming PDL is also said to be at a gradual pace, rather than a sharp increase of Rs30/ltr from 1st July. Some news flows suggest a levy of Rs5/ltr, which would increase up to Rs50/ltr over time. Applying the same to our CPI forecasts (refer to graph on right), takes the annual estimated PDL collection a little above the Rs550bn target and slightly alters the pace of increase in the coming months. However, our average inflation reading for FY23 remains close to our previous estimates of 18.5%.
Outlook
Announcement of reaching to a Staff Level agreement is expected to revive investor confidence in the equity and forex markets, putting brakes on the ongoing correction. The KSE100 Index has corrected by 5% in the ongoing quarter, while the PKR has slid by 12% during the same period.
A successful conclusion will not only unlock a disbursement of US$900mn from IMF, but also will be followed by China debt rollover of US$2.5bn and Saudi fund rollover of US$2bn immediately, pumping SBP foreign exchange reserves by almost US$5.5bn in the next 1-1.5 months. To recall, SBP reserves have reached at a more than 2 year-low of US$8.9bn, with an import cover of less than 5 weeks.
As data reflects a strong correlation of levels of import cover and market multiples, we expect an agreement on IMF’s disbursement to improve the country’s import cover, compounded by ongoing corrective measures, leading to market participant pricing in the on-going corporate profitability and dividend pay outs.