Lula vetoes project that extends payroll exemption

President Luiz Inácio Lula da Silva (PT) justified the full veto on payroll tax relief in 17 sectors as “unconstitutionality”, according to the publication in the Official Gazette of the Union (DOU) this Friday (24).

Lula held the decision until the last possible day and announced the veto on Thursday night (23), contradicting sectors of the productive market. The Senate approved the extension of the exemption on October 25th and forwarded the proposal for presidential sanction.

According to Lula, the extension of the exemption was vetoed for “contrary to the public interest and unconstitutionality”.

“Despite the legislator’s good intentions, the legislative proposal suffers from an unconstitutionality defect and goes against the public interest, given that it creates a revenue waiver without presenting a statement of budgetary-financial impact for the current year and the following two”, said in the justification (see in full).

The president says, in the veto, that he heard the recommendations of ministers Fernando Haddad, of Finance, and Simone Tebet, of Planning and Budget.

Lula’s decision represents a victory for Haddad, who seeks to increase federal revenue. However, the veto can be overturned by Congress. The exemption for the 17 sectors costs the government around R$9.4 billion per year. With the veto of the extension, the measure will be valid until December 31st of this year.

The expectation is that the minister will make a statement or give an interview this Friday (24) to explain the reasons that led him to suggest the veto to the president.

In mid-August, Haddad stated that the extension of the exemption could impact the Social Security gap, saying that the proposal “creates a new tax waiver, without backing, without replacement.”

“What will the Social Security deficit look like? So, it’s a question of reasonableness. I’m not asking for anything that’s unreasonable,” he said at the time.

Still in the first semester, the minister criticized the processing of the proposal, stating that Congress was touching on an issue that was already under discussion in the government, and that would be addressed in the second phase of the income tax reform — it was promised for the second semester and now it should be until next year.

Veto contradicts previous STF decision

Despite saying that the bill is unconstitutional, Lula contradicted a previous decision by the Federal Supreme Court (STF) which declared that the law is constitutional and that it does not alter a regime already in force.

It also contradicted opinions from the Chamber of Deputies and the Senate, which confirmed the constitutionality of the exemption.

In 2021, then minister Ricardo Lewandowski stated in a vote that “the extension of the validity period of the replacement cannot be considered a new institution, as it does not translate a new regime, but rather the maintenance of a regime already in force and authorized”.

This is because the exemption regime was created before the last Social Security reform, in 2019, which barred the creation of new contribution regimes.

Shortly after the announcement of the veto, the author of the proposal, senator Efraim Filho (União-PB), said that “it will be up to us to overturn the veto this year”.

“It will become more and more expensive to hire people. Who is the biggest loser from this? Fathers and mothers of families who lose their jobs and the condition of, with the sweat of their brow, putting bread on the table at home”, he stated.

The project’s rapporteur in the Senate, Angelo Coronel (PSD-BA), completed Efraim’s speech and said that “in the same way that the President of the Republic has the right to veto any project approved in Congress, Congress also has the right to overturn this veto. That’s what we’re going to work to make happen,” he said.

The expectation is that the veto will be discussed at the next Congress meeting.

Government stated that there was no commitment to sanction

At the end of October, the Minister of Institutional Relations, Alexandre Padilha, stated that there was no commitment from the federal government to fully sanction the proposal. Payroll relief is a mechanism that allows companies in benefiting sectors to pay rates of 1% to 4.5% on gross revenue, instead of 20% on payroll.

The permission came into effect 12 years ago for some areas and currently covers 17 sectors. The project maintained the exemption until December 31, 2027.

Currently, the sectors covered by the exemption are: clothing and clothing, footwear, civil construction, call center, communication, construction companies and infrastructure works, leather, manufacturing of vehicles and bodies, machinery and equipment, animal protein, textiles, technology information, communication technology, integrated circuit design, metro-rail passenger transport, public road transport and road freight transport.