FY26 Budget: Proposed Stock Market Measures
Staff Report
Islamabad: In continuation of our report titled ‘Pakistan Federal Budget FY26 Preview: Fiscal Consolidation to Continue; Third Consecutive Year of Primary Surplus,’ released on May 22, 2025, we outline additional proposed measures that the government may announce in the upcoming budget on June 10, 2025, as per recent reports.
Increase in Tax Rates on Passive Income: As reported, FBR is considering increasing tax rates on passive income by 2–3% in the upcoming budget, mainly on bank deposits and savings schemes. Currently, the Passive income is taxed at 15% for filers and 35% for non-filers. Although news doesn’t outline an increase in tax on Capital gain and dividend income, we believe that tax on capital gain and dividend income may also be enhanced if income on debt is taxed at 17–18%, compared to the current 15%.Pakistan Federal Budget FY26 Preview
This increase in the tax rate from 15% to 17–18% is likely to have a negative impact on local equities.
However, we believe the dividend income and Capital Gains Tax (CGT) will still remain under the full and final tax regime. Any change in the regime of this income from full and final to normal tax regime will be negative in our view.
While we reproduce below some of the key/select tax measures that will impact the stock market and our view of their impact,” Topline said.
CGT on Derivatives: PSX has proposed that the current CGT of 15% on all derivatives and future contracts traded on PSX be taxed in line with future commodity contracts traded on PMEX at 5%. We believe it is less likely that this proposal will get approval,” Topline said.
Removal of Tax on Bonus Shares: In Budget FY24, the Government imposed a 10% tax on each shareholder at the time of issuance of bonus shares. PSX proposed that the tax on bonus shares should be withdrawn, as they believe the current treatment is very detrimental to the growth of the capital market and has hampered the issuance of bonus shares by listed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: As per news reports, 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: PSX proposed that the corporate tax rate should be permanently lowered for listed companies, by giving a tax credit of 20% of the tax payable for those companies that meet the prescribed requirements, including a minimum free float of 25% throughout. We believe this proposal may be difficult to accommodate.
Tax on Intercorporate Dividend: PSX has proposed the restoration of the exemption on inter-corporate dividend between companies eligible for group taxation. We believe the government will continue to maintain the tax on intercorporate dividends in the upcoming budget for FY26.
Elimination of minimum tax regime for listed companies: PSX has proposed that the minimum tax regime should be eliminated from listed companies, as such companies are strongly compliant with the specific documentation requirements of various statutes. Currently, companies are subject to a minimum tax of 1.25% of their turnover. We do not expect any change in the minimum tax regime.
Some other tax measures floated in the news after the release of our budget Preview
Increase in WHT for Non-Filers on Cash Withdrawals: FBR has proposed raising the withholding tax on cash withdrawals by non-filers from 0.6% to 1.2% on amounts exceeding Rs 50,000 in a single day. The possibility of this proposal being implemented cannot be ruled out.
Increase in GST on Locally Manufactured Cars: The government is likely to impose the standard sales tax rate of 18% on locally manufactured cars with engine capacity up to 850cc in the FY26 budget. Currently, a reduced rate of 12.5% applies to these vehicles. We expect the likelihood of happening of this measure happening to be high to remove preferential sales tax treatment on vehicles below 850cc. If implemented, this measure would be negative for local auto manufacturers operating in the hatchback category, namely Pak Suzuki Motors (PSMC).
Imposition of Levy on Gasoline Powered Vehicles: Alongside the above news, the government is also contemplating imposing an additional 5% levy on all gasoline-powered vehicles to promote Electric Vehicles. The government aims to collect Rs25-30bn through this measure. We do not expect the blanket imposition of this measure.
Market Outlook:
Topline believed the budget would be largely neutral for the market in the short term based on these likely measures. However, over the longer term, the market will take it positively, considering a stable economic roadmap likely to be signaled by this budget.
It is also mentioned in our annual strategy report released on November 16, 2024, that approval of the budget in line with IMF guidelines would be a key catalyst for re-rating of the market multiple to the historic average. Currently market is trading at a 2026E PE of 5.3x, 24% lower than the historic forward PE of 7x. We maintain our base case Index Target of 127,000 for Dec 2025. However, with higher liquidity, the index can cross the 150,000 mark assuming a successful IMF review in Sep 2025 and political/geo-political stability.
