Status quo maintained on equity taxes

Express Tribune

11-06-2025

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The Federal Budget FY26 has been largely welcomed by market participants, particularly equity investors, as it avoids raising capital gains or dividend taxes while introducing policies favouring equities over fixed income. While some sectors stand to benefit, others face selective pressures, resulting in a broadly balanced economic impact.
For the Pakistan Stock Exchange (PSX), the budget brought relief as the Capital Gains Tax (CGT) on equities remains unchanged at 15%, dispelling fears of a potential hike, said Ali Najib, Deputy Head of Research at AHL. The government also raised the tax on interest income to 20% (from 15%), though National Savings Schemes (NSS) are exempt. This shift is seen as favourable for equities, encouraging investors to move from fixed income to stocks and mutual funds.
Waqas Ghani Kukaswadia, Research Head at JS Global, noted that income from loans will now be taxed at 25%, further discouraging debt-oriented funds. Additionally, a 7% excise duty on commercial construction has been removed, and federal stamp duty on real estate transfers has been reduced from 4% to 1%, likely encouraging real estate transactions and indirectly supporting the construction sector.
On the banking front, the impact is neutral. The government proposed raising the withholding tax (WHT) on cash withdrawals from 0.6% to 1% for non-filers, while profit on debt will attract a 20% tax. A 5% tax on foreign digital payments has also been introduced, seen as revenue-enhancing without significantly disrupting banking operations.
Construction and real estate sectors benefit from multiple relief measures. WHT on property transactions has been reduced significantly – from 4% to 2.5% for higher-value transactions, and from 3.5% to 2% and 3% to 1.5% for others. A tax credit for affordable housing and a Rs5 billion housing subsidy are expected to spur demand, benefiting cement and steel industries. Stamp duty on real estate transfers has been reduced federally from 4% to 1%, with provinces likely to follow. The removal of excise duty on commercial construction projects further incentivises builders and developers.
In real estate rentals, a 4% tax on rental income has been introduced, balanced by the abolishment of the Federal Excise Duty (FED) on plot transfers. Overall, these changes are seen as neutral to positive for the sector.
The auto sector faces negative adjustments. The concessional 18% GST slab for hybrid vehicles now applies to all cars previously enjoying a lower rate, while incentives for small cars have been withdrawn, potentially raising prices for lower-end vehicles. An EV policy for two- and three-wheelers has been proposed to reduce emissions, alongside a new carbon tax on auto fuels. Over the next five years, additional customs duty and regulatory duty on imported vehicles will be gradually removed, increasing competitive pressure on local automakers.
The budget proposes a gradual removal of tax exemptions for the FATA/PATA regions to reduce market distortions and create a level playing field for manufacturers elsewhere, with sales tax exemptions to be phased out by FY29. For the cement sector, the Rs5 billion housing subsidy and tax credits for affordable housing are expected to spur demand.
The power sector impact is neutral, though the removal of the cap on the 10% Distribution Surcharge may slightly raise industrial tariffas. In oil and gas, a Rs2.5/litre carbon levy was introduced, with neutral impact on Oil Marketing Companies.
Tech sector tax exemptions for SEZ/STZ zones are capped until 2035. Other steps include super tax relief, higher e-commerce WHT, and support for PIA's privatisation.