By Marcela Ayres

BRASILIA, Reuters – Brazilian President Jair Bolsonaro has signed a decree to reduce taxes on industrial goods (IPI), by 35% effective May 1. This is a greater tax reduction than the 25 percent that is currently in effect. He claims this will increase economic activity after the country recovers from the pandemic.

Industries who manufacture and import manufactured products like televisions, refrigerators, air conditioners, or cars are subject to an IPI tax.

This decree does not have to be approved in Congress. It will result in a drop of 15.2 Billion Reis (or 3.08 billion dollars) in government revenue this year.

The Economy Ministry estimates that the tax exemption will be 23.4 billion reais by 2022 due to the 25 percent reduction in force over the past two months, and an additional cut now. According to the government, revenues will fall by 27.4 Billion reais and 29.3 Billion reais respectively in 2023-2024.

Brazil’s tax cuts were announced for the first time in February. They are designed to aid industries and reduce inflation.

It is being done despite concerns about the legality of previous moves. Bolsonaro rejected the pledge by Economy Minister Paulo Guedes that the IPI would be reduced to 33% instead of 25% in March. However, there were questions over the legality.

The Supreme Court received an injunction request from the Republican Party of the Social Order, (PROS), challenging the constitutionality of the tax cut. It argued it was a threat to the Manaus Free Trade Zone located in the state of Amazonas.

Manaus Free Trade Zone businesses are exempt from IPI. Companies can earn credits equivalent to industrial tax, as well as make deductions for other taxes. Their fiscal advantage is reduced if their IPI rate is lower.

The new tax cut resulted in the government excluding products that represent around 76% revenue of Manaus Free Trade Zone. This left them with 25% less industrial tax.

In February, the 18.5% vehicle tax reduction was not increased and tobacco products were still excluded from all benefits.

($1 = 4.9385 reais)