(Adds comments from Pakistan High Commissioner)
By Shadia Nasralla
LONDON, April 4 (Reuters) - Increases in British aid to Pakistan should be put on hold unless Pakistan's government collects more tax from the rich and fights corruption effectively, a parliamentary committee urged on Thursday.
A planned 67 percent increase to 446 million pounds ($675 million) in aid to Pakistan next year would make it the largest recipient of British development money at a time when the UK is cutting public spending at home.
"... development assistance should be conditional on the Pakistan authorities committing to and implementing economic reforms and policy changes that will foster inclusive economic and social development," the International Development Committee said in a report.
Its chairman Malcolm Bruce added: "We cannot expect people in the UK to pay taxes to improve education and health in Pakistan if the Pakistani elite does not pay meaningful amounts of income tax."
But the Pakistan High Commissioner in the UK Wajid Shamsul Hasan told Reuters he was positive that aid would be increased.
Only about half a percent of Pakistanis paid income tax last year and no one has been prosecuted for income tax fraud for at least 25 years, the report said, citing the Pakistan Federal Board of Revenue.
The report added: "Making Pakistan the largest recipient of UK aid is controversial given Pakistan's unstable politics, large defence budget, historic levels of significant corruption, tax avoidance, low levels of expenditure on education and health programmes and its status as a middle income country."
Calling on the British government to use its influence at the International Monetary Fund to press for tax reforms in Pakistan, Bruce said that a clear anti-corruption strategy was vital for Pakistan's relations with aid donors.
Foreign aid amounts to 0.7 percent of the UK's gross national income and is one of only three sectors, alongside health and education, which has been ringfenced as other departments suffer deep cuts to their budgets.
In 2011-12 Britain's overseas development spending reached almost 9 billion pounds, including that by the Department for International Development (DFID) and aid delivered bilaterally by other government departments, official statistics show.
DFID said it will help Pakistan to reform its tax system, but a spokesperson noted UK development assistance in Pakistan is predicated on a commitment to such reforms and to helping lift the poorest out of poverty.
Hasan said British donors had no cause to worry as Pakistan has identified 3.1 million potential new taxpayers and more than doubled its tax collection from almost 850 billion Pakistani rupees ($8.64 billion) in June 2008 to over 1.8 trillion in June last year.
"They will require us to perform better and that we will do," he said. "They will not cut down any aid, they will increase the aid."
Stressing Pakistan's will to increase tax revenue, Hasan also said that the country had lost about $67 billion dollars due to its war on terror in the region.
"It is because of the Western invasion of Afghanistan that we are in such a mess ..," he said.
Britain, home to a one-million strong Pakistani diaspora, one of the largest in the world, currently gives Pakistan 267 million pounds a year.
(Reporting By Shadia Nasralla; editing by Stephen Addison)
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