Stop extra UK aid to Pakistan unless taxes increase, urge MPs

The UK government should withhold extra aid to Pakistan unless the country does more to gather taxes from its wealthier citizens, a group of MPs has said.

The International Development Committee said British taxpayers should not be paying for health and education in Pakistan while rich Pakistanis were paying little tax.

They also urged ministers to ensure aid was focused on anti-corruption efforts.

Ministers said they were committed to ensuring tax reform took place.

The government is planning to double the amount of aid it provides to Pakistan from £267m in 2012-13 to £446m in 2014-15, making it the largest recipient of UK aid.

The UK is the world's second-largest donor of international aid, with only the Netherlands, Denmark, Norway, Sweden and Luxembourg spending a higher proportion of their national income on overseas support, according to the latest OECD figures.

The committee accepted there was a "powerful case" for maintaining bilateral aid to Pakistan, which has "long-established ties" with the UK and "real poverty and serious security problems".

But the MPs said they could not support the use of British taxpayers' money for aid in Pakistan without ensuring the new Pakistani government, to be elected in May this year, was committed to reforming the tax system.

The report said Pakistan had a lower-than-average tax take, with only 0.57% of Pakistanis - 768,000 individuals - paying income tax last year. In comparable countries, the level is about 15%.

Lib Dem Sir Malcolm Bruce, chairman of the cross-party committee, said there was no issue with providing aid to help Pakistan's poorest people, but "it was a question of how justified it is to increase it rapidly at a time when wealthiest people in Pakistan are paying little or no tax".

He told BBC Radio 4's Today programme: "Unless [Pakistan is] prepared to work with us to deliver real improvements in health, education and poverty reduction, then we can't be expected to go on providing money from taxpayers in Britain earning less than wealthy non-taxpayers in Pakistan."

The MPs recommended that as a "significant friend" of Pakistan the UK should "do all it can" to encourage effective tax collection.

They called on the DfID to work with other donor countries and the International Monetary Fund to push for reform of Pakistan's tax system and back a national campaign to build domestic political momentum for change.

The committee also criticised the Department for International Development (DfID) for failing to put corruption, frequent absences in the rule of law and low tax collection at the top of the agenda for its governance work in Pakistan.

Sir Malcolm added: "It is vital for Pakistan, and its relations with external aid donors, that the new government provides clear evidence that it will own and implement an effective anti-corruption strategy.

"DfID must likewise set measurable targets against which to measure and confirm positive impacts arising from effective investment in anti-corruption measures."

Pakistan High Commissioner Wajid Shamsul Hasan said the tax collection net had been increased from 1,000bn Pakistan rupees (£6.72bn) at the beginning of the century to 2,000bn rupees by the end of 2012, with a "substantial increase in the number of taxpayers".

And although figures showed that 69% of National Assembly members and 63% of Senate members did not pay taxes in 2011, Mr Hasan said that people who had not were now banned from running for public office.

He urged Britain to continue providing aid. "I would say that they should be paying knowing well what sort of problems we have [been] put into by this 30-year-long war against terrorism in the region.

"We have spent $67bn (£44bn) since 2011 in this war against terror, our infrastructure has been destroyed, our education has been destroyed."

A spokesman for the DfID said: "The UK government is clear that UK development assistance in Pakistan is predicated on a commitment to economic and tax reform and to helping lift the poorest out of poverty.

"We have made it clear to government and opposition politicians in Pakistan that it is not sustainable for British taxpayers to fund development spend if Pakistan is not building up its own stable tax take."

He added: "Reform must start from the top down, with elected politicians and the wealthiest in Pakistan showing a commitment to reform by submitting tax returns and paying tax due.

Shadow international development secretary Ivan Lewis said: "Hard-pressed British taxpayers have a right to expect that alongside our support, the government of Pakistan is taking all necessary steps to collect the tax revenue which will play a crucial part in the country's long-term capacity to end high levels of poverty.

"It is also true that we will only be able to achieve our aim to end aid dependency globally by 2030, if there is a concerted effort to prevent the tax dodging by some multinational companies which the evidence shows denies developing countries vast amounts of revenue."

The latest OECD figures show that the UK spent $13.7bn (£9.1bn) - 0.56% of its national income - on international aid in 2012, behind only the US.

The prime minister has pledged to raise it to 0.7% by the end of this year.