Super tax of 10% will be imposed on FY22 earnings: Miftah Ismail

By Kashan Bhatti

Karachi, June 24, 2022: 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 annual profit of over Rs300 million.

Hence, the effective tax rate for specified sectors would increase from 29% to 39% for Tax Year 2022 and will be at 29% in Tax Year 2023. That said, additional 10% tax will be a one-off tax and will not apply to tax year 2023. 

As per Finance Minister speech, these specified sectors include Sugar, Cement, Steel, Textiles, Tobacco, Fertilizer, Banks, Oil & Gas, Beverages, Automobiles, Airline, Chemical and LNG Terminal. The exact list will be available once the emended Budget document is released.

This will negatively impact earnings of these big companies by 14% in year 2022. No impact on future profits as Finance Minister mentioned that this one-time super tax of 10% will impact 2022 earnings of above-mentioned sectors/companies.

For other sectors, effective tax rate is likely to increase from 29% to 33% in tax year 2022 as additional 4% tax will be levied over and above the corporate tax rate. For tax year 2023, effective tax rate will 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 effective tax rate of 39% previously. For banks, tax on government securities (having ADR of less than 50%) will be at rates as proposed in Finance Bill. From tax year 2023, effective tax rate of banks will be 42%, we believe. More clarity in 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%.

As per our estimate, this measure can result in additional tax collection of Rs250-300bn for government. This may help in achieving the revenue and deficit target set by IMF. Government is likely to set tax revenue target of Rs7.4trn up from the initial target set of Rs7trn for FY23. Though this move will affect companies profits for the current year, we believe that the valuation is still attractive. Market after this measure is trading at a PE of 4-5x. We think currency and macro stability after IMF will provide the much needed support to local bourse.

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