Miftah Ismail, Finance Minister of Pakistan, in his speech in the parliament, announced an additional one-time super tax of 10% to be imposed on FY22 earnings on specified sectors where companies make an annual profit of over Rs300mn. Hence, the effective tax rate for selected sectors would increase from 29% to 39% for Tax Year 2022 and 29% in Tax Year 2023. That said, the additional 10% tax will be a one-off and will not apply to the tax year 2023.
As per Finance Minister’s speech, these sectors include Sugar, Cement, Steel, Textiles, Tobacco, Fertilizer, Banks, Oil & Gas, Beverages, Automobiles, airlines, chemicals and LNG terminals. The exact list will be available once the amended Budget document is released.
This will negatively impact the earnings of these big companies by 14% in the year 2022. No impact on future profits as Finance Minister mentioned that this one-time super tax of 10% will impact 2022 earnings of sectors mentioned above/companies.
For other sectors, the effective tax rate will likely increase from 29% to 33% in 2022 as an additional 4% tax will be levied over and above the corporate tax rate. For the tax year 2023, the effective tax rate will be 29%, as there will be no additional tax.
As per our initial understanding, effective tax rates for banks will increase to 43% in Tax Year 2022 from the effective tax rate of 39%. For banks, tax on government securities (having ADR of less than 50%) will be at rates as proposed in Finance Bill. From the tax year 2023, we believe the effective tax rate of banks will be 42%. More clarity on this is still awaited.
Smaller companies, earnings over Rs150mn and less than Rs200mn will be subject to 1% tax. For companies, earnings between Rs200mn to Rs250mn will be subject to 2% tax, whereas companies earning between Rs250mn to Rs300mn will be subject to 3%.
Government is likely to set a tax revenue target of Rs7.4trn up from the initial target set of Rs7trn for FY23. Per our estimate, this measure can result in additional tax collection of Rs250-300bn for the government. This may help in achieving the revenue and deficit target set by IMF.
We think currency and macro stability after IMF will provide the much-needed support to the local bourse. Though this move will affect companies’ profits for the current year, we believe the valuation is still attractive. Market after this measure is trading at a PE of 4-5x.
Courtesy – Topline Research