Islamabad: The Federal Budget for FY27 has been unveiled with a projected fiscal deficit of 3.6% of GDP, primarily supported by new provincial grants totaling PkR1.0 trillion. This financial backing from provinces allows the government to launch new programs worth PkR680 billion while allocating PkR750 billion for contingent liabilities and emergency needs. The budget aims to foster economic growth by offering tax reductions to the salaried class, removing the Super Tax for firms with lower earnings, providing relief measures for exporters, and maintaining tax incentives for IT firms over the next three years.

According to AKD Securities Limited, the overall market sentiment is expected to remain positive due to the absence of aggressive revenue-generating measures and the elimination of the Super Tax for companies with profitability below PkR500 million. Additionally, the tax rate for firms with profits exceeding PkR500 million has been reduced to 8%, although this reduction does not apply to the Financials, Fertilizer, and Eand P sectors. The government's ongoing reliance on Islamic financing instruments is also viewed favorably for the Pakistan Stock Exchange (PSX). Exporters are set to benefit from reduced Advance Tax and Withholding Tax (WHT), the extended Export Financing Scheme (EFS), and the removal of the Export Development Surcharge, particularly aiding the Textile and Cement sectors. The Cement sector, in particular, is poised for gains from reduced taxes on immovable property and increased development expenditure allocations. Meanwhile, the Refinery sector is likely to gain from the abolition of GST on imported machinery for refinery upgrades.

The budget outlines a tax revenue increase target of 17.8% against a nominal GDP growth of 12.2% for FY27. Achieving this target requires additional taxation measures of approximately PkR700 billion through enhanced revenue mobilization and expanded tax nets, particularly via FBR taxation reforms. The fiscal deficit necessitates comprehensive fiscal reforms in collaboration with provinces, as evidenced by the PkR1.0 trillion in grants collected under a new arrangement and a 30.1% rise in provincial transfers. The Federal government has also planned for loan recoveries worth PkR407 billion from provinces for FY27.

The elimination of the Super Tax appears to be progressing, with fiscal space created by additional provincial support. Following last year's 0.5% reduction in the Super Tax for companies with incomes between PkR200 million and PkR500 million, the government has now abolished it entirely for companies with profitability below PkR500 million and reduced it by 2% for those with profits above PkR500 million. This change is anticipated to benefit approximately 67% of companies listed on the PSX, with beneficiaries nearly evenly divided between those receiving a complete abolition and those benefiting from a reduced Super Tax rate.

The budget proves favorable for the cement and construction materials sectors, bolstered by a significantly higher Public Sector Development Program (PSDP) allocation of PkR3.7 trillion for the upcoming year, reduced taxes on the sale and purchase of immovable assets, and a PkR71 billion allocation for the subsidized PM Apna Ghar scheme. Tax reductions for exporters, alongside increased allocations for subsidized financing schemes, are also expected to benefit the Textile and Cement sectors. However, the auto sector may face challenges due to increased GST on hybrids and Federal Excise Duty (FED) on certain vehicles. Top picks identified include OGDC, PPL, UBL, MEBL, HBL, FFC, ENGROH, PSO, LUCK, FCCL, INDU, ILP, and SYS.