Oil & Gas Marketing – Budget Impact

Oil & Gas Marketing – Budget Impact


Reduction and exemption of duty on bi-products

Bitumen, JP4 & JP8 have been exempted from duty.


PDL and GDS targets for FY09 set

The target for Petroleum Development Levy (PDL) has been set at PKR14bn against PKR8.2bn lasy year while that for Gas Development Surcharge has been set at PKR17.375bn against PKR21.057bn last year.


Impact – Neutral to Positive

• We understand that while the Petroleum Development Levy collection target will decide local petrol prices in FY09, Gas Development Surcharge will have no implications for gas companies.

• The decision to cut down some taxes on bi-products such as bitumen, JP4 and JP8 will help increase the volumetric sale of such products.

FEDERAL BUDGET 2008-09

Power – Budget Impact

Power – Budget Impact

NSS rates & Govt. Commercial Paper

Given the huge fiscal deficit and domestic revenue constraints, the government has announced a raise in the return on National Saving Schemes (NSS) by 200bps. Further, the Central Directorate of National Savings has also been directed to launch 3-, 6- and 12- month papers --- Government Commercial Papers ---, rates of which would be market competitive. The rates on NSS schemes would now be revised quarterly instead of biannually so as to minimise the gap between NSS and market rates.

Subsidies to WAPDA & KESC

The subsidies for WAPDA have been set at PKR74.612bn for FY09 against PKR113.658bn last year while that for KESC has been set at PKR13.8bn against PKR19.596bn last year.

Import of power generation plants

WAPDA and its generation companies have been allowed temporary import of power generation plants free of customs duty as against the existing rate of 5% duty.

Allocation for power sector

An allocation of Rs. 66 billion has been made for a number of power sector projects. It is estimated that 2,200 MW of power will be brought on stream by the early next year.

Tax on transfer of profits

Profit transferred by a branch of foreign company out of Pakistan are proposed to be treated as dividend and chargeable to tax @ 10% as final tax.

Recipient of services

The liability of recipient of excisable services to pay duty has been established. Accordingly, an enabling provision has been made to charge duty from the recipient of services coming from abroad and terminating in Pakistan.

Impact - Neutral to Negative

• An allocation of PKR66bn for the purpose of setting-up of new power sector projects should not only improve the power shortage in the country but also help produce electricity at much cheaper rates compared to thermal power generation.

• Increase in NSS rates by 200bps shall have material negative impact on the valuations of IPPs that are considered close to corporate bond due to fixed project tenure and relatively stable dividend stream.

• We understand that the subsidies allocated to the power utilities would help partially off-set the impact of rising crude price and help insulate the utilities’ consumers from the impact of rising electricity generation costs.

Cement - Budget Impact

Cement – Budget Impact

Public Sector Development Program

The Public Sector Development Program (PSDP) has been marginally raised by 5% to PKR549.7bn for FY09 against the last year’s budgetary target of PKR520bn. The government has announced the construction of 314 small dams while continuing with major infrastructure projects such as raising of Mangla Dam and budget allocations for Mirani Dam, Sabakzai Dam, Kurram Tangi Dam, Gomal Zam Dam, Greater Thal Cannal, Kachhi Canal etc. Meanwhile, the government has deferred any announcement on the construction of the controversial, Kalabagh Dam.

Central Excise Duty (CED)

Central Excise Duty (CED) which stood at PKR750 per ton (PKR37.5/bag) has been raised to PKR900/ton (PKR45/bag).

General Sales Tax (GST)

GST has been raised by 100bps to 16%.

New tax system on real estates

A new taxation system is being introduced for builders and developers, whereby the builder would be required to pay tax @ Rs.50 per sq. ft. of the covered area of a unit. The developer of open plots would be subjected to tax @ Rs.100 per sq. yard of the plot.

Low cost housing

It has been proposed that 1 million housing units be added to country's housing stock, for low income groups and government employees. It has also been decided to allocate Rs.2 billion as a revolving fund which will be further expanded in future.

Impact – Neutral

• The decision to marginally raise PSDP allocation would not have any major impact on cement sales since cement demand largely emnates from private sector projects and exports. We would, however, like to caution that any major issue on the macro economic front like the persistent twin deficits may force the government to slash PSDP allocation during the year.

• A marginal increase in CED by PKR7.5/bag would not have any major impact on the costing of cement companies especially given the sector’s orientation towards exports, where margins are high. Accordingly, we foresee exports rising during the times to come and serving as a mitigant to the government’s decision to maintain CED at current levels.

• The decision to raise GST by 100bps would not have any significant impact given its pass-through nature.

• The announcement to build 1.0 million housing units to the country’s housing stock should augur favourably for the sector.

• On the other hand imposition of tax on real estate may hamper rising foreign and local investment in the sector, which may result in a decline in construction activity in the country.

Textile, PSF and Chemicals - Budgetary Impact

Textile, PSF and Chemicals – Budget Impact


Minimum wage up to PKR6,000

The minimum wage level has been raised from PKR4,600/- to PKR6,000 per employee per month.

Withdrawn of 0.5% on turnover

Minimum tax payable on the declared turnover @ 0.5% is being proposed to be withdrawn.

R&D subsidy

R&D subsidy on exports of fabrics and value added products has not been mentioned in Budget FY09 against a net subsidy of PKR19bn for FY8.
Reduction of duties on various items

Duty has been reduced on calcium carbide from 15% to 5%; PTA from 15% to 7.5%; PSF 6.5% to 4.5%; Caustic soda from Rs.5,000/MT to Rs.4,000/MT and Textile Buckram from 25% to 10%.

Zero rating of Acetic Acid

Acetic acid is used extensively in the textile industry which is zero rated. To save the manufacturers of acetic acid from the hassle of refunds, its raw materials including molasses has also been zero rated.

Zero rating of Caustic Soda etc

It is being proposed that caustic soda/.flakes, cotton linter and sequins should be zero rated so that financial liquidity in the textile sector is increased and the textile producers are free from the hassles of delays in getting refunds on this account.

Duty on polyester films reduced

The rate of duty for polyester films is proposed to bring at par with other items of the same category and it will also become liable to 20% duty.

Impact - Neutral to Positive

• The increase in minimum wage rate would further add to the cost pressures for the industry especially for spinning and weaving segments.

• On the other hand zero rating of some major inputs for textiles should augur well for the sector.

Insurance - Budget impact

Insurance – Budget Impact


Capital Gain Tax (CGT)

Exemption available to capital gains on shares of listed companies upto the tax year ending June 30, 2008 has been extended to June 30, 2010 without any change in the withholding tax and CVT regime.

Accumulated loss in case of amalgamating companies

To encourage amalgamation of banking companies, modarabas and insurance companies the facility of carry forward of “accumulated loss” is proposed to be allowed for a period of six years in the case of amalgamated or amalgamating companies.

Exemption of unrealized gains for tax purpose

Income shown as unrealized gains in the case of non life insurance companies would be excluded from the taxable income and not charged to tax.

Imposition of 5% WHT on reinsurance premium

It has been proposed that reinsurance premium paid to overseas insurance companies may be subjected to withholding tax @ 5% which would be a final tax.

Rate of FED raise on franchise

In order to meet the revenue requirements, FED rate has been enhanced from 5% to 10% on banking, insurance and franchise services.

Impact - Neutral to Positive

• It is worth mentioning that investment income constitutes a major portion of the profitability of insurance companies. With the government having granted exemption on CGT, we see insurance companies benefitting from this move.

• The facility of carryforward of accumulated loss should help encourage amalgamation in the banking sector.

• The decision to exclude income shown as unrealised gains from taxable income in the case of non-life insurance companies should bode favourably since unrealised gains contribute heavily to the bottom line of insurance companies.

• The decision to raise FED rate on insurance services will increase the cost of insurance business and henc bode negatively for the insurance sector.

• The decision to subject re-insurance premium to 5% withholding tax would not have any impact given the fact that insurance companies can pass through this cost in the form of high premiums.I

Commercial Banks - Budget impat

Commercial Banks – Budget


Tax on cash withdrawals

The previous 0.2% With Holding Tax (WHT) on cash withdrawals of PKR25,000 or more has been raised to 0.3%.


Agri-Credit

Budget FY09 has focussed on the agriculture sector especially in light of spiralling food prices & supply shortages. Accordingly, agri-credit target has been set at PKR160bn for FY09. In addition, the government is also revamping ZTBL in an attempt to broaden its outreach.


NSS rates & Govt. Commercial Paper

Given the huge fiscal deficit and domestic revenue constraints, the government has announced a raise in the return on National Saving Schemes (NSS) by 200bps. Further, the Central Directorate of National Savings has also been directed to launch 3-, 6- and 12- month papers --- Government Commercial Papers ---, rates of which would be market competitive. The rates on NSS schemes would now be revised quarterly instead of biannually so as to minimise the gap between NSS and market rates.


Accumulated loss in case of amalgamating companies

To encourage amalgamation of banking companies, modarabas and insurance companies the facility of carry forward of “accumulated loss” is proposed to be allowed for a period of six years in the case of amalgamated or amalgamating companies.


CVT on Power of Attorney

In the case of bank no CVT is proposed to be charged on General Power of Attorney unless it is used into force the mortgage of property offered as collateral against a loan.


Imposition of tax on profit transfer

Profit transferred by a branch of foreign company out of Pakistan are proposed to be treated as dividend and chargeable to tax @ 10% as final tax.


Thin capitalization

Thin capitalization rule is proposed to be made applicable to branches of foreign companies operating in Pakistan.


Elimination of provisions of 7th Schedule

The provisions of 7th Schedule allowing deduction on account of non-performing loans as per prudential regulation issued by the SBP are proposed to be deleted. From the next financial year such deductions would be allowed under sections 29 and 29A of the Income Tax Ordinance, 2001.


Rate of FED raise on franchise

In order to meet the revenue requirements, FED rate has been enhanced from 5% to 10% on banking, insurance and franchise services.



Microfinance

The government will strive to increase the outreach of microfinance services to 3 million borrowers by 2010 including increase in rural microfinance.
Bank
FEDERAL BUDGET 2008-09

Impact – Neutral

• We believe tax on cash withdrawal is unlikely to have any significant effect since banks will transfer the relevant costs on to their customers.

• In addition, the decision to increase agri-credit and SMEs’ financing will help boost banks’ advances since both – agricultural sector and SMEs – are the untapped segments of the economy.

• Further, the current upward revision in NSS rates and the launch of new short-term savings schemes could expedite a shift of deposits from low cost current and saving accounts to these papers. However, what one needs to appreciate is the fact that banks in Pakistan are used for transactional and safety purposes. They also offer a high level of flexibility and service quality. Further, there is a segment of depositors who avoid interest due to religious reasons. A quick analysis of the depositors’ profile indicates that banks drive most of their large deposits from corporate depositors who in most cases fetch market returns and will therefore remain unaffected by the current surge in NSS rates. Accordingly, we feel that the net impact of a raise in NSS rates on banks would be mutted.

• The facility of carryforward of accumulated loss should help encourage amalgamation in the banking sector.

• U/S 29A of Income Tax Ordinance, 2001 3% of total income for consumer loans may be deducted against the said income to banking companies for creation of a reserve for the purpose of setting off any future bad debts pertaining to consumer banking loans. However if the bad debts arising on consumer loans actually written off exceeds the said reserves, it will not be adjustable against any other income of the bank but shall be carried forward for adjsutemnst against such reserves for the next year. The decision to allow deductions on account of NPLs under the above clause implies classification of debts as doubtful for tax purposes. This shall bode negatively for banks in future.

• The decision to increase the outreach of micro-finance is bound to augur positively for NBP in particular.

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