What is the rate? – 07/15/2023 – Samuel Pessôa

The value of the Value Added Tax (IVA) rate that will be created to replace ISS, ICMS, PIS, Cofins and IPI has been hotly debated. Countless people have said that there is no transparency in the calculation of the rate.

I have two difficulties with this question. First, the rate will be whatever the policy wants it to be. And the rate will be lower or higher according to the need to finance the Brazilian State in a non-inflationary manner. Regardless of whether or not the Tax Reform of indirect taxes is approved, the National Congress, the state Legislative Assemblies and the Chambers of Councilors can always change the rate. In fact, they do it repeatedly.

Second, a proposal for a constitutional amendment (PEC) is being processed in the Senate. The Federal Constitution is not the place to discuss the rate. In the Charter, general principles of taxation are established —I have discussed the subject in some detail here.

However, it is relatively simple to know what the average rate should be so that the tax burden does not rise. We only need to know how much we have paid. The average rate practiced is given by the ratio, for a given time interval, between total tax revenue and household consumption. The average of the average rates practiced between 2015 and 2019 was 24%. To avoid possible distortions, I have excluded the pandemic years.

We already pay one of the highest VATs in the world. And no tax reform will change that fact. To change it, we have to greatly reduce public spending, a measure that, it seems to me, society does not want. It is enough to remember that Lula, newly elected and before taking office, led the National Congress in raising public spending by just under R$ 200 billion, with great approval from public opinion.

In the text of the Tax Reform PEC approved by the Chamber, numerous sectors had privileged treatment and will be taxed at a rate of 40% of the full rate.

It is worth knowing the sectors: education services; health services; medical and accessibility devices for the disabled; medicines and basic menstrual health care products; urban, semi-urban, metropolitan, intercity and interstate collective public transport services by road, rail and water; agricultural and aquaculture, fishing, forestry and in natura vegetable extractive products; agricultural and aquaculture inputs, food for human consumption and personal hygiene products; national artistic, cultural, journalistic and audiovisual productions and sports activities; goods and services related to national security and sovereignty, information security and cybernetics.

There are sectors that will be exempt. They are: urban rehabilitation activities in historic areas and critical areas for urban recovery and reconversion; education services provided by ProUni; urban, semi-urban or metropolitan public transport services; rural producer individual or legal entity with annual revenue of less than R$ 3.6 million and for integrated products; services related to Perse (emergency program to resume the events sector); and national basic basket items.

What we have is the choice of a bunch of half-prices. Each sector that benefits from a reduced rate (or exemption) will cause the rate to rise for all others. The average rate, however, will be 24%. And that.

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