Budget’s impact on listed firms: Who benefits, who faces challenge

Infographics: TBS

The national budget proposed on Monday introduces several measures aimed at revitalising the capital market. The primary beneficiaries of these tax incentives are market intermediaries and listed companies, while general retail investors will not receive direct benefits, market analysts said.

With tax exemptions introduced in some sectors and tax increases in others, the impact on listed companies will be mixed. Certain sectors are expected to benefit, while others may face challenges. For sectors where tax policies remain unchanged, business conditions are likely to stay stable. 

Market analysts believe the real effects of these tax changes on the capital market will become clearer over time.

Sector-wise impact

According to EBL Securities' budget review, the proposed tax exemptions will positively affect profits in pharmaceutical, cement, real estate, power, food, engineering, IT, and automobile sectors. 

Conversely, companies in the steel, textile, tobacco, and construction sectors may face negative consequences due to increased tax rates. The brokerage house added that the paper and telecom sectors will likely see no significant impact.

Corporate tax and market incentives

The budget proposes widening the corporate tax rate gap between listed and non-listed companies from 5% to 7.5%, subject to certain conditions. This move aims to encourage more companies to list on the stock market, deepening market liquidity and transparency.

To reduce costs for market intermediaries, the source tax on brokerage house transactions will be lowered from 0.05% to 0.03%. Merchant banks will receive significant relief with a planned corporate tax rate cut from 37.5% to 27.5%. However, withholding tax on interest income from fixed income securities is set to increase from 5% to 10%. This rise may reduce fixed income returns and encourage investors to shift toward equities, stimulating capital market activity amid economic challenges.

Pharmaceutical and chemical sector

The government has extended the VAT exemption on manufacturing Active Pharmaceutical Ingredients (APIs) until 30 June, 2030. Duty concessions have also been expanded to cover 53 raw materials used in chronic disease and anti-cancer drug production. 

Hospitals with over 50 beds will benefit from duty reductions on imported machinery. Import duties on two raw materials for pesticides have been reduced, and VAT exemption for manufacturing LABSA and SLES – key raw materials for soap and shampoo – has been extended until 30 June, 2027.

EBL Securities notes that these measures aim to promote local API manufacturing, reducing production costs of certain chronic disease drugs, especially anti-cancer medicines. Lower taxes on pesticide raw materials will help reduce costs in that sector. However, higher taxes on raw materials for soap production are expected to increase costs.

As a result, major pharmaceutical companies such as Beximco Pharma, Beacon Pharma, Square Pharma, Renata, ACME Lab, IBN SINA, Active Fine, Reckitt Benckiser, Kohinoor, ACI, ACI Formulations, ACME Pesticides, and JMI Hospital are likely to see improved profitability.

Consumer electronics

The proposed budget gradually reduces the VAT exemption on locally made washing machines, microwave ovens, and electric ovens until June 2030. The supplementary duty (SD) exemption on imported raw materials for refrigerators, freezers, air conditioners, and compressors is extended to June 2028. 

Reduced VAT exemption on elevators is extended until June 2030. Lithium and graphene battery manufacturers remain fully VAT-exempt until June 2027, with partial exemption until June 2030. Customs duty on LED light parts rises from 10% to 25%.

The brokerage house said the VAT reduction may raise production costs and prices moderately but allows manufacturers time to adjust. The extended SD exemption will lower costs for appliance makers. 

Reduced VAT on elevators may slightly increase costs but supports local production. VAT relief for battery makers will improve competitiveness, and higher customs duty on LED parts will boost local manufacturers by cutting import reliance.

Fuel and power sector

The withholding tax on electricity purchases has been reduced from 6% to 4%, lowering energy costs for businesses. The government has withdrawn the minimum value requirement on bulk imports of base oil, easing procurement and reducing production costs for fuel and lubricant producers.

The VAT exemption for gas cylinder manufacturing has been slightly adjusted but extended until 30 June, 2027, ensuring continued affordability and production.

The withholding tax rate for gas distribution companies has seen a significant drop from 2% to 0.6%, providing direct financial relief and encouraging investment in gas infrastructure.

EBL Securities noted that the reduction in tax deducted at source will increase net revenues of independent power producers, boosting profitability. Local lube oil blenders will benefit from lower duties on raw materials, especially when global prices are low, reducing production costs and enhancing competitiveness.

However, manufacturing costs for LPG cylinders may rise due to increased VAT payments, potentially affecting prices and margins. Gas distribution companies will see higher net revenues thanks to the reduced withholding tax, offering further financial relief.

Food sector

The supplementary duty (SD) on all types of ice cream has been halved from 10% to 5%. This reduction is expected to lower the overall tax burden on producers, which may encourage price cuts and increase consumer demand.

The import duty on refined sugar has also been reduced from Tk4,500 per metric ton to Tk4,000. This is likely to reduce raw material costs for food and beverage manufacturers and support price stability in related consumer products.

Cement sector

The supplementary duty (SD) on limestone imports for cement manufacturers has been eliminated, reduced from 10% to 0%. This withdrawal of SD is expected to lower raw material costs, improving profit margins for integrated cement manufacturers.

Key companies like LafargeHolcim, Heidelberg Cement, Crown Cement, Premier Cement, and Confidence Cement are anticipated to benefit from this change.

Real estate sector

To discourage undisclosed funds and ensure properties are registered at their actual sale values, the source tax on capital gains from land transfers has been reduced by location—from 8%, 6%, and 4% to 6%, 4%, and 3%, respectively.

If the actual sale price exceeds the deed value, and this excess is supported by documentation or bank statements, the extra amount will be taxed according to the applicable capital gains tax rate.

The brokerage house believes this will encourage sellers to register land at true market prices, promoting accurate documentation and greater transparency. This, combined with a slowdown in the construction sector, presents an opportunity for real estate companies to increase formal land and flat sales, legalise undisclosed funds, and benefit from slightly lower property transfer costs. Consequently, profitability in this sector is expected to grow.

Other sectors

IT sector companies, automobile manufacturers, and miscellaneous companies like GQ Ball Pen Industries are also expected to see improved profitability.

On the other hand, the steel and textile sectors are likely to face declining profitability due to increased tax rates.