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Second mini-budget positive for capital markets growth

The recent positivity in stock markets came after the government announced the second supplementary budget withdrawing critical taxes on capital markets, lifting the ban on purchase of vehicles by non-filers of income tax returns and facilitating industry, agriculture and small and medium enterprises. The government has extended a range of reforms intended to stimulate exports, increase investment in capital markets and resolve outstanding issues pertaining to the Gas Infrastructure Development Cess (GIDC) and tax refunds. The budget is positive for capital markets, as it will reduce the cost of doing business and generate volumes which will encourage investors to participate. The next few months will eventually decide the outcome of the measures announced by the government and it will be keenly watched by investors, businessman and opposition parties alike.

Salient features

The rates of advance on sale and purchase of securities have been decreased from 0.02% to 0.01% on the value of sale and purchase of shares considering during day trading only one side commission is being charged by the broker. Moreover, this advance tax isn’t leviable on proprietary trades since they do not grant any brokerage commission.

The mini-budget permits stock players to carry forward capital losses up to three years for capital gain tax (CGT) purposes. The abolition of restrictions on carry forward of capital losses has remained a long-established request of the broker community and reports indicate that the government will make revisions in the ITO to permit the carry forward of capital made on the sale of securities. Furthermore, the CGT is going to be rationalized at the same level with real-estate. According to brokers, the tax inconsistency between several asset classes is dissuading the public from investing in the capital market. Moreover, the tax rates on gains made on the sale of securities and immoveable property are being regulated by bringing tax rate for immoveable property at parity with securities. Also, the mechanism for renewal of license for brokers has been made easy, which would allow securities broker license to be renewed upon submission of minimal documents along with token fines. And a completely fresh section of eligible securities has been introduced in the Margin Trade and Deliverable Futures Market to raise activity and liquidity.

The stock market is showing healthy gains under the lead of auto, cement, steel and textile groups. However, selling pressure in some of the heavy weights belonging to oil and exploration groups squeezed the overall rally at the local bourse. According to an analyst, improvement in the country’s capital market was limited owing to decline in crude oil prices which squeezed the run at the oil groups, where some of the blue chips lost weight.

 

The fiscal consolidation measures announced in the mini-budget are a step in the right direction toward short-term adjustments. However, for the fiscal consolidation path to be sustainable, additional interventions will be needed in the areas of tax administration and tax policy; fiscal decentralization; the legislative framework governing public finance; and measures to improve spending efficiency. With lower fiscal deficits, the private sector will have greater access to market borrowing for productive investments than it currently enjoys. To ensure these opportunities can be tapped into, innovative approaches may be needed to leverage private sector funds to maximize financing for development.

The challenges Pakistan is facing demand that key political and economic players realize the gravity of the situation and evolve a short-term consensus regarding a minimum economic agenda to ensure political stability in the tough phase ahead. Now is the time for private sector to rise up to the occasion as without local investor mobilization, expecting Foreign Direct Investment (FDI) inflows in unrealistic. Presently, the asset owning class, with its very narrow focus, is clearly inclined towards short-term investment avenues to keep their money rolling. If the government could mobilize this class to develop an appetite for risk, come out of their comfort zones and assume charge for industrialization, the current economic stress can serve to reorient the direction of the economy towards a more stable base.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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