Budget FY26 Reduces Super Tax: Boost for Corporate Earnings and PSX Companies

The Overseas Investors Chamber of Commerce and Industry (OICCI) has expressed its approval of the Federal Budget 2025-26, highlighting the government's measured strategy amidst fiscal pressures. A key aspect of their welcome is the partial rationalisation of the super tax, a levy that has significantly impacted corporate earnings in recent years.

What the Budget Changed for Super Tax

The budget introduces specific changes to the super tax structure. For companies with taxable income between Rs150 million and Rs500 million, the super tax has been completely abolished. Furthermore, for companies earning above Rs500 million, the super tax rate has been reduced from 10% to 8%. This adjustment aims to ease the tax burden on large, formal sector businesses, which OICCI noted have disproportionately borne the brunt of tax collection efforts.

Here is a summary of the super tax changes:

Why it matters for Corporate Earnings

The super-tax is an additional levy on highly profitable companies, directly reducing their net income. A reduction or abolition of this tax means that a larger portion of a company's pre-tax profit will be retained, either boosting earnings per share or allowing for higher dividend payouts. This directly enhances corporate profitability and can improve cash flows, potentially freeing up capital for reinvestment or debt reduction. For companies that were paying the super tax, this rationalisation is a clear positive for their financial performance.

Which stocks, and why

This budget measure is broadly positive for large, profitable companies across various sectors that have historically been subject to the super tax. Major banks, for instance, are typically among the highest taxpayers. Companies like Habib Bank, United Bank, MCB Bank, and Meezan Bank stand to benefit from the reduced tax burden, which can improve their net interest income and overall profitability. Similarly, large oil and gas exploration companies such as Oil & Gas Development Company, Pakistan Petroleum, and Pakistan Oilfields, which often report substantial profits, will see a positive impact on their bottom lines. In the fertilizer sector, major players like Fauji Fertilizer and Engro Corporation (through its fertilizer and other profitable subsidiaries) will also experience improved earnings. Diversified conglomerates like Lucky Cement and ICI Pakistan, with their varied profitable segments, are also likely beneficiaries. Even large IT exporters like Systems Limited, which generate significant profits, will see a positive effect from this tax relief.

What to watch

Investors should monitor the upcoming quarterly financial results of these companies to observe the actual impact of the super tax rationalisation on their profitability. The government's overall revenue collection performance and any future adjustments to tax policies in subsequent mini-budgets or finance bills will also be important to watch. The OICCI's continued advocacy for formalisation of the economy and broadening the tax base remains a key theme, as the current budget's reliance on existing taxpayers is still a concern.