July 06 - 12, 2009

The performance of the capital market has been very poor throughout 2008-09. The activity was very low while index dropped down from 1200 to the level of about 4500. Capital market, which has been passing through different turmoil in past, expects some positive relief from the budget. The budget imposed levy of FED of 16 percent on the commission, which brokers charge from their clients, against the removal of CVT of 0.02 percent on purchase. According to the brokers community, the affect is somewhat neutral and does not have any major impact on the performance of the capital market. "The affect of the FED on the brokers' commission will be neutralized by the removal of CVT," says Asif Qureshi, Director at Invisor securities Ltd.

Although the impact of the budget is seen as neutral but there are two main concerns. One is the commission rate that varies from house to house, second the collection of FED. Considering the first issue, brokers need to realize that in order to equalize the impact-the FED on the transactions cost versus CVT-they need to adjust their commission rate in such a way that the impact of FED can be neutralized. Chart below shows the comparison between FED charges or Rs. 100 per share at different commission rate with CVT.

1 100 0.05 0.009 0.02
2 100 0.10 0.016 0.02
3 100 0.12 0.192 0.02
4 100 0.13 0.021 0.02
5 100 0.15 0.024 0.02

It can be seen that percentage of FED changes with the change of commission rate, which means that if the commission rate exceeds 0.12 paisa the client will be paying more than the CVT. However, this is only one side of the picture and since every picture has two sides this picture also has its second side that is, charging of FED on both sales and purchases which when added will increase the CVT rate if the commission charge is increased from 0.05 paisa. This can be seen in the following table.

1 100 0.05 0.009 0.009 0.016 0.02
2 100 0.10 0.016 0.016 0.032 0.02
3 100 0.12 0.192 0.192 0.039 0.02
4 100 0.13 0.021 0.021 0.042 0.02
5 100 0.15 0.024 0.024 0.048 0.02

The table above depicts that the transaction cost in total will increase if the commission rate is 0.063 paisa or more, and the reason behind this change is that clients will now pay taxes for both type of transactions. Therefore, there is a need for brokers' community to realize that they should standardize their commission slab.

Now the second concern is regarding the submission of the FED to the government. If FED is collected through registering in excise department, it will involve tax collector and it has been observed that the amount of tax collection becomes lower as forecasted in the budget. This leads to a proposal by the exchange that they should directly collect the FED from their members on behalf of the government as it has been done in the case of CVT.

Budget 2009-10 has also positive impact on the cement sector as it reduced excise duty on cement, whereas oil and power sector will also be affected positively from this budget. However, with the increase of service charges on bank from 10 percent to 15 percent and imposition of taxes on services sector like insurance may impact the financial sector negatively which has put the whole sector under pressure. A relatively balanced budget renews much needed focus on growth but is exposed to externalities, according to AKD securities. It believes that budgetary impacts on banking, oil exploration and production, fertilizer, insurance, telecom and textile sectors would be neutral while cement, oil marketing, power and auto sectors would benefit from the measures taken in the budget.