Everything You Need to Know About the Upcoming Budget
The coalition government is set to present its first budget for FY25 on June 10, 2024, in parliament.
This timing aligns with reports that the Staff Level Agreement (SLA) may be formally announced by the end of June or early July 2024, contingent on compliance with prior actions and amendments in some tax laws through the Finance Bill 2024-25.
The FY25 Budget is expected to be a crucial step for the IMF, moving Pakistan closer to the SLA.
The budget aims for a primary surplus of Rs. 500-700 billion or 0.4-0.5% of GDP and sets an FBR revenue target of Rs. 11.5-12.5 trillion, a 25-33% increase from this year’s estimate of Rs. 9.2-9.4 trillion.
Major Revenue Measures in the New Budget:
– Increase in GST by 1% to 19%
– Introduction of tax on pensioners
– Removal of exemptions on FATA/PATA
– Increase in tax rates on non-tax filers
– Carbon Tax or increase in Petroleum Development Levy (PDL)
– Personal income tax reforms
– Tax on retailers and wholesalers
– Increase in FED on cigarettes
– Removal of exemption or increase in sales tax on certain goods like pharmaceuticals and food items
Revenue Measures in Other Countries’ IMF Programs:
– Introduction of gift tax, wealth transfer tax, and inheritance tax
– Removal of sector-specific exemptions and reduced corporate income tax rates
– Imposing VAT on non-residents’ e-commerce
– Streamlining VAT laws and removing VAT exemptions
– Eliminating tax exemptions for SOEs
– Environmental surcharge on multiple car ownership
– Increased tax on land registration and foreign travel
The FBR collection mix is expected to shift towards direct tax (38% in FY25 from 35% in FY24) with a 25% year-on-year growth in absolute targets. This could come from increases in existing tax rates and bringing untapped segments into the tax net.
The non-tax revenue target is set at Rs. 2.1 trillion, 28% lower than FY24’s target of Rs. 2.9 trillion, but it has the potential to exceed its target as seen in FY24.
On economic indicators, the government is setting a GDP growth target of 3.6% alongside an inflation target of 12.5-12.7%.
For FY25, the KSE 100 is expected to benefit from PE re-rating led by the approval of a new IMF financing facility, with the current forward PE of 3.8x potentially reverting to its historical mean of 6.93x, subject to the successful commencement and completion of the new IMF program.
Expenses:
– Total outlay of Rs. 16.7 trillion (+15% YoY)
– Debt servicing estimated at Rs. 9.7 trillion, a 33% YoY increase
– Development expense budget expected to cross Rs. 1 trillion, similar to last year
– Subsidy and pension expenses likely to increase by 42% and 20% YoY, respectively
– Defence budget expected to be Rs. 2 trillion (+11% YoY)
FY24 is poised for its first primary surplus since FY04, and Budget FY25 aims for another surplus. However, the Rs. 10 trillion in interest payments will likely lead to an overall 6.8% fiscal deficit, potentially hindering growth.
Impact on PSX:
The budget may be neutral to negative for the stock market in the short term, but if the government implements realistic revenue measures as desired by the IMF, the market will react positively in the medium term. The budget is expected to pave the way for a new IMF program, aiding in PE re-rating.
The government may increase taxes on dividends, capital gains, and interest income to meet the high tax target, affecting net returns for stock market investors.
The Index could reach 87,000 points by December 2024 and 106,000 by June 2025, subject to the successful commencement and completion of the IMF program review.
In anticipation of the ‘reform dividend,’ equity markets will likely overlook negative impacts from higher taxes on listed companies, given the urgent need to secure a larger IMF program to address Pakistan’s annual external financing needs of around US$25 billion.
