* Annual GDP growth can top 7.5 pct the next 3 years - president
* 2014 budget deficit seen at 5.2 pct of GDP, from this year's 5.8 pct
* Finance sector will need to pay 2 pct "nation-building tax"
* Merger of small financial institutions proposed (Adds foreign borrowing, international bond, telecom levy)
By Shihar Aneez and Ranga Sirilal
COLOMBO, Nov 21 (Reuters) - Sri Lanka's president announced he was raising taxes on banks in a 2014 budget that aims to spur growth, shrink the budget deficit and expand the stock exchange in Colombo.
President Mahinda Rajapaksa, who is also the finance minister, said a 2 percent "nation-building tax" (NBT) that some industries already pay will be extended to banks and financial institutions.
"We need money, and banks have plenty of money," Finance Secretary P.B. Jayasundera told a post-budget forum in Colombo on Thursday. "The nation-building tax is a broad-base turnover tax. Without taxes, a government can't perform."
The International Monetary Fund has repeatedly called on Sri Lanka to widen its tax net and improve collection to raise government revenue, which is about 13 percent of gross domestic product (GDP), one of the lowest levels in the region.
A budget summary showed the government aims to raise 41.4 billion rupees ($315.9 million) in new tax revenue, including from the NBT on financial institutions and value added tax (VAT) in supermarkets. It also raised a telecommunications levy to 25 percent from 20 percent.
Banks will have to pay the NBT, which is based on corporate revenue and was introduced in 2009, from Jan. 1. A budget document showed the government aims to increase its receipts from the tax to 63.1 billion rupees in 2014, up 29.3 percent from this year.
The new tax "will have an impact on the profits of banks and financial institutions," K.G.D.D. Dheerasinghe, deputy chairman of listed Commercial Bank of Ceylon said. But the government needs to get revenue up to 15-16 percent of GDP, he said, and taxes on banking came down two years ago, "so I do not have an objection to this tax."
Central Bank Governor Ajith Nivard Cabraal said the new tax will be passed on to customers.
In the budget, Rajapaksa also proposed merging small financial institutions, which Jayasundera said should help to keep the financial system stable.
Rajapaksa said Sri Lanka will reach this year's budget deficit target of 5.8 percent of GDP and the level will fall to 5.2 percent next year. That would be its lowest since 1977.
Sri Lanka aims to have annual GDP growth of more than 7.5 percent during the next three years, compared with an estimated 7.2 percent this year, he said.
Rajapaksa said the country can reduce its debt-to-GDP ratio, which was about 80 percent last year, to 65 percent by 2016. He proposed to float two $750 million long-term international bonds for housing and state development projects.
Sri Lanka plans 234 billion rupees of foreign borrowing in 2014 including 97.5 billion commercial borrowing, a little less than this year's 247.1 billion rupees.
The president said he wanted to give companies in finance, insurance and manufacturing an incentive to list their shares on the Colombo Stock Exchange. He offered those that float next year a 50 percent reduction in corporate tax for three years. The corporate tax rate is 28 percent.
The Colombo exchange now has 288 listed companies. A two-year, 50 percent tax holiday announced a year ago as an incentive to list has not brought results. Only two companies joined the exchange in 2013.
Rajapaksa maintained existing budget subsidies for agriculture and allocated more funds to irrigation, agriculture, health and education. He raised a cost of living allowance for civil servants by a minimum of 1,200 rupees ($9.20) a month.
Public investment will be raised by 32 percent to 668.5 billion rupees, 6.7 percent of GDP, from last year's 5.8 percent.
The president's second six-year term is due to end in November 2016. Some are speculating he may call elections early.
($1 = 131.1000 Sri Lanka rupees) (Editing by Mark Trevelyan)