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Brazil’s lower house approves landmark consumption tax reform

Brazil's lower house approves landmark consumption tax reform
© Reuters. FILE PHOTO: The skyline of Recife is seen at sunset June 22, 2014. REUTERS/Paul Hanna

BRASILIA (Reuters) – Brazil’s lower house approved on Friday a major consumption tax overhaul, seen as capable of boosting the country’s potential growth, although its effective implementation hinges on subsequent bills and an extended transition period.

The reform had initially been approved by deputies in July, but had to be voted on again after the Senate made changes to the text before passing it last month.

In the two required votes, as the reform is a constitutional amendment, lawmakers voted 371 to 121 and 365 to 118 to pass the bill, both well above the required 308 votes.

The reform will now be signed into law in a joint session of Congress expected to take place next week.

The eagerly anticipated reform, repeatedly attempted by previous administrations, is a central pillar of Lula’s plans to boost productivity and the potential growth of Latin America’s largest economy.

It aims to simplify Brazil’s notoriously complex tax system, which imposes high compliance costs on businesses.

The proposal consolidates five existing levies into a value-added tax (VAT) with distinct federal and regional rates, to be determined later through complementary bills. The full implementation of the new taxes is expected only in 2033.

It also introduces a selective tax targeting products considered harmful to the environment and health.

In contrast to the Senate version, the final text approved by the lower house excludes certain sectors the Senate had added to the list of those eligible for more advantageous tax schemes, such as sanitation services, highway concessions and air transportation services.

The reform also shifts the tax base from the point of production to the point of consumption over a 50-year transition period starting in 2029, a change expected to favor Brazil’s wealthier and more populous states.

To offset these changes, the reform introduces various funds and compensation mechanisms for states, many of which have been viewed with reservations by analysts due to their high fiscal cost over an extended period.

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