Daily Call

REP- 300 April 6, 2018

Amnesty Scheme Economy

Tax Reforms – A boon for domestic and external sectors
FBR Tax Collection Much-awaited Amnesty scheme announced
(PKR bn) Direct Taxes Indirect Taxes The Government of Pakistan has announced radical changes to the taxation policy of the
4,000 country whereby it has proposed Foreign Assets Declaration & Repatriation Ordinance. The
3,500 government is enticing offshore assets held by Pakistanis by way of a nominal 2% penalty
3,000 on repatriation of those funds. In addition, the government is also offering a 3% penalty to
2,500 declare assets held abroad. Moreover, the famous Section 111(4) of Income Tax Ordinance
2,000 (which exempts overseas remittances from all questions by the FBR) would be amended
1,500 whereby a limit of USD 100,000 per annum will be introduced. With these changes any
1,000 remittances above USD 100,000 might attract scrutiny from the tax authorities.
500 To keep holders of domestic assets at par with offshore asset holders, the government has
- also introduced Voluntary Declaration of Domestic Assets Ordinance whereby all
FY03

FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY04

undeclared assets held domestically before Jun’17, may be declared at a payment of 5%.
Since the real estate has been the preferred asset class for hiding illegitimate wealth in
Source: FBR, AHL Research
Pakistan due to discrepancy between declared rates and market rates, the government is
Trade Deficit Driving C/A Deficit drastically overhauling the rules governing valuation and transfer of properties whereby it
C/A Deficit will hold the right to purchase the property within six month of registration at a higher price
C/A Deficit % of Trade Deficit (RHS) (100% higher for FY19, 75% higher for FY20 and 50% higher for FY21).
(USD bn)
Finally to reward the tax paying salaried class, the government has lowered tax brackets for
14 0.5
salaried individuals to a maximum of 15% from 30% previously.
12
0.4
10
Exhibit: Amnesty Scheme Exhibit: Income Tax Reforms
8 0.3
Assets Type Tax Rate Annual Income Tax Rate
6 0.2
Local Assets Declared 5.0% Up to PKR 1.2mn 0.0%
4
2
0.1 Foreign Assets Repatriated in Cash or 3% Bonds 2.0% Up to PKR 2.4mn 5.0%
0 0 Foreign Assets Declared but not Repatriated 3.0% Up to PKR 4.8mn 10.0%
Foreign Liquid Assets Declared 5.0% Over PKR 4.8mn 15.0%
FY12

FY13

FY14

FY15

FY16

FY17

Source: MoF, AHL Research Source: MoF, AHL Research

Source: SBP, AHL Research
Exhibit: Property Tax Reforms
1) 1% Adjustable tax on property
2) Govt will have right to purchase any property
a) At 100% more than value declared by owner during FY19
b) At 75% more in FY20
c) At 75% more in FY21
3) FBR rate on property tax to be abolished from 1st July
4) Non-Filers cannot purchase the property worth over PKR 4.0mn
Source: MoF, AHL Research

Impact of the Amnesty Scheme – positive for documented economy

We believe that introduction of the tax reforms introduced by the ruling government is an
attempt to fundamentally change the taxation structure of the country through an increase
in the documentation of economy which is an extension of previous policies of penalizing
the non-filers via higher tax rates. This effort is not only expected to bring new tax filers into
Analyst
the tax net but would also reduce the share of undocumented classes in the overall
Samiullah Tariq
economy. Moreover, with overhaul of the taxation and valuation system governing real
sami.tariq@arifhabibltd.com
estate transactions in the country, more money is expected to flow in the documented sector
+92-21-32462742
thereby resulting in an increase in corporatization, higher savings rate and enhanced
taxation. Moreover, a lot of investment is stuck in real estate in Pakistan which will come in
www.arifhabibltd.com circulation resulting in an increase in economic activity and employment.

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April 6, 2018
In addition, these steps are expected to bring in precious foreign exchange worth USD 5bn
into the country which is much needed at present as Pakistan’s Current Account Deficit has
widened 50% YoY to USD 10.8bn during 8MFY18 on the back of growing imports (+17.3%
to USD 35.6bn) resulting in 22% higher trade deficit of USD 19.69bn.

Banking and Auto sectors to benefit the most

We believe the banking sector and automobile sector are expected to benefit the most as
new inflows are expected to boost the deposit base of banks while increase in disposable
incomes will lift the demand for consumer durables and automobiles.
This development will be materially positive for the market and is expected to reduce
uncertainty regarding sustainability of Pakistan’s Balance of Payments.

www.arifhabibltd.com

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April 6, 2018
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Arif Habib Limited (AHL) uses three rating categories, depending upon return form current market price, with Target period as December 2018 for Target Price. In addition,
return excludes all type of taxes. For more details kindly refer the following table;

Rating Description
BUY Upside* of subject security(ies) is more than +10% from last closing of market price(s)
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SELL Upside* of subject security(ies) is less than -10% from last closing of market price(s)
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AHL Research uses the following valuation technique(s) to arrive at the period end target prices;
 Discounted Cash Flow (DCF)
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 Sum of the Parts (SoTP)
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Risks
The following risks may potentially impact our valuations of subject security (ies);
 Market risk
 Interest Rate Risk
 Exchange Rate (Currency) Risk

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