June 5, 2015 / 4:16 PM / 5 years ago

Pakistan budget targets more tax payers to bring down deficit

ISLAMABAD (Reuters) - Pakistan aims to boost revenues by 9 percent to $42 billion in 2015/16, Finance Minister Ishaq Dar said on Friday, as he delivered a budget aimed at consolidating gains the economy has made since being rocked by the global financial crisis.

Pakistan's Prime Minister Nawaz Sharif waves after attending the Pakistan Day parade in Islamabad March 23, 2015. REUTERS/Faisal Mahmood

Spending will also increase but more modestly, Dar predicted, leaving a budget deficit forecast of 4.3 percent of GDP for the coming financial year (July-June), down from 5.0 percent in 2014/15.

Key to reaching next year’s targets will be broadening Pakistan’s woefully narrow tax base, Dar told parliament in Islamabad.

“Our government considers tax increases a pre-condition for economic growth,” he said, speaking in Urdu.

Dar said the burden of changes would not fall on the poor.

“Our proposals ensure that the affluent classes, and especially those who do not pay taxes, also fulfil their national obligation by coming into the tax net.”

Only about one in 200 citizens files income tax, leaving the state asking donors to fund crumbling schools and hospitals.

Dar said the government would seek to end tax exemptions which are common and look at ways of punishing those who dodge taxes.

But with many legislators, ministers and businessmen believed to be among them, mustering the political will to push through reform could prove difficult.

Capital gains tax on securities will be increased, in a move traders on the Karachi Stock Exchange said would be bearish in the short term. The benchmark 100-share index has risen by around 16 percent over the last 12 months.

“FASTER GROWTH NEEDED”

The economic blueprint for 2015/16 envisages GDP growth of 5.5 percent. It is a sharp jump from this year’s 4.2 percent, itself the fastest expansion since 2007/08 when the financial crisis hit Pakistan hard.

Investor confidence has returned as the economy shows signs of stabilising amid historically low interest rates, falling inflation and support from international lending agencies.

But economists caution that militant violence, daily power outages curtailing industrial production and abysmally low tax collection rates threaten to hold Pakistan back.

Even if Pakistan does hit its growth target, it is short of what the country of around 190 million people needs, they added.

“Considering our population, to generate enough employment for a growing workforce our GDP (growth) should be around 7 percent plus,” said Muzzammil Aslam of the think-tank Emerging Economics Research.

Dar has said the deficit could have been narrowed further in 2015/16, but for a major military operation against militants in tribal areas along the Afghan-Pakistan border and the costs of accommodating thousands of people displaced by the violence.

In figures previously announced, defence spending next year is expected to be 772 billion rupees, including 45-50 billion for the operation, an increase of 10 percent over 2014/15.

Imports of liquefied natural gas through a new port facility in Karachi should help make power supplies more reliable, although there have been teething problems at the terminal.

Infrastructure projects will get a major boost in the coming years from a $46 billion deal signed with China earlier this year to open up a road and energy corridor between the two countries.

Writing by Mike Collett-White; editing by Andrew Roche

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