Experts Suggest Growth In The Brazilian Economy With A Necessary Transition

In the early hours of last Friday (7), the Chamber of Deputies approved the basic text of the Proposed Amendment to the Constitution (PEC) of the tax reform. The proposal unifies 5 taxes into 2, the so-called dual VAT (Value Added Tax). One would be managed by the Union and the other would be shared by states and municipalities. The main focus is on consumption, but the text also deals with income and property taxation.

main demand

According to Gustavo Vettori, a professor at the Faculty of Economics, Administration, Accounting and Actuarial Science (FEA) at USP, the main demand “was for the simplification and unification of taxes and contributions that were levied on the same basis, which was consumption, and the removal of competence from states and municipalities to define a series of things, thus avoiding a fiscal war that we have been seeing mainly between states, but also between municipalities.”

Maintaining a VAT at the federal level and another at the state/municipal level is less worrying, in the professor’s analysis, and will include the collection of states and municipalities.

Despite the fact that the new amendment partially achieves this objective, there are still points of conflict, as Vettori explains: “We have the maintenance of a tribute called Selective Tax in the hands of the Union, which was not ideal, it was one of the reforms that was being processed in the Senate. This was not originally in PEC 45, there are a series of ‘complimeters’ to keep this tribute in the hands of the Union”.

Transition period

The entire proposed reform takes time to be applied because it deals with a series of issues, such as the definition of the rate, which has not yet been made. “It is important for us to be clear that what was voted was just an amendment to the constitution. But the skeleton of these taxes and several rules still depend on a complementary law, which will still have to be voted, will still have to finish being elaborated and voted and it will not be now”.

The entire transition foresees the departure of one system and the arrival of another, consecutively: “In 2026, we have the tax at the federal level (CBS) at a rate of 0.9% and the IBS, which is the one that goes to the states and municipalities at a rate of 0.1%. That 0.1% is just for a trial period. Those 0.9 is already something. And then, in 2027, we have the CBS that replaces PIS and Cofins, already entering its full rate. And then, from 2029 to 2032, the IBS rate will rise and the ICMS and ISS rate will end”, explains Vettori, who warns: “This transition has to be very carefully observed to guarantee that there really is not an extrapolation of collection”.

taxpayer and consumer

There are criticisms of the proposal, which point mainly to the impacts on the pocket of the average Brazilian consumer. “Basket items that currently have a lower rate or are exempt are now taxed and this will increase prices. Some sectors that today have a lower rate said that there would be a price increase, that it would be impossible in sectors that could also affect the population in a very large way, such as health, education, etc”.

As a result, the amendment also suggested a cashback , analogous to existing programs such as Bolsa Família, which would return whatever was collected to low-income families. However, there was also resistance. “It was not accepted that this alone was enough, not least because the affected sectors complained and managed to sensitize the Legislative. We have a 100% reduction in rates for products in the basic food basket and this national basic food basket will be defined, later, by complementary law”, says Vettori.

The reduction in the rate, which must be balanced, is observed in several sectors, not only those related to the food sector: “We already have the forecast for several agricultural, horticultural products, etc. a 100% reduction in the rate and also for medical and accessibility devices. And then, we have some sectors that have already guaranteed a reduction in the constitutional amendment of 60% of the rate, including health and education, other medical devices, transport and some agricultural inputs. The big concern is the gate opening and other sectors starting to be inserted and we continue with a sectoral taxation as we had been having with ICMS, IPI and etc”, points out the professor.

For Vettori, it is possible that there will be growth in the economy “if the system really progresses towards a simpler system and if they do not cut more than they already cut from taxation in sectors, as was done in this proposed amendment, I think there is a possibility of growth”.