Pakistan stock market likely to be re-rated following budget announcement

Pakistan's equity market would likely be re-rated following the approval of the budget for fiscal year 2025-26, which would be in line with the International Monetary Fund's (IMF) demands.

This would pave the way for receiving more financial support from the international lender and for the index to climb to 127,000 points by December.

According to a report of brokerage house Topline Securities, the budget's approval in line with IMF guidelines would be a key catalyst for re-rating of market multiple to historic average.

Currently, the market is trading at 2026E PE of 5.3x, 24% lower than historic forward PE of 7x.

"Topline maintains the index target of 127,000 by December. However, with higher liquidity, the index can cross the 150,000 mark assuming successful IMF review in Sept and political/geo-political stability," the report stated

Key tax measures that will impact stock market

CGT on derivatives

The Pakistan Stock Exchange proposed that current capital gains tax (CGT) of 15% on all derivatives and future contracts traded on PSX should be taxed in line with future commodity contracts traded on PMEX at 5%.

Topline believes that this proposal will likely not be accepted.

Removal of tax on bonus shares

In Budget FY24, the government imposed 10% tax from each shareholder at the time of issuance of bonus shares. The PSX proposed the tax on bonus shares should be withdrawn as it believes the current treatment is very detrimental to the growth of the capital market and has hampered the issuance of bonus shares by listed companies.

Rationalization of Super Tax

There are chances that the Super Tax will be rationalized. This will impact the profitability of listed companies.

Rationalization of tax rates for companies listed at PSX

The PSX also proposed that corporate tax rate should be permanently lowered for listed companies, by giving tax credit of 20% of tax payable for those companies that meet the prescribed requirements including a minimum free float of 25% throughout. Topline believes this proposal may be difficult to accommodate.

Tax on intercorporate dividend

The PSX= proposed the restoration of exemption on intercorporate dividend between companies eligible for group taxation. The brokerage house believes the government will continue to maintain tax on intercorporate dividends in the upcoming budget for FY26.

Elimination of minimum tax regime for listed companies

The PSX proposed that the minimum tax regime should be eliminated from listed companies as such companies are strongly compliant towards specific documentation requirements of various statutes. Currently, companies are subject to a minimum tax of 1.25% of the turnover. The brokerage house does not expect any change in minimum tax regime.

Increase in WHT for non-filers on cash withdrawals

The tax collection body — the Federal Board of Revenue — proposed raising the withholding tax on cash withdrawals by non-filers from 0.6% to 1.2% on amounts exceeding PKR 50,000 in a single day. The possibility of this proposal being implemented cannot be ruled out.

Imposition of levy on fuel-powered vehicles

Alongside above news, the government is also contemplating about imposing an additional 5% levy on all fuel-powered vehicles to promote electric vehicles. The government aims to collect PKR 25-30 billion through this measure. Topline does not expect blanket imposition of this measure.