Ecuador will increase VAT from 12% to 13% to finance the fight against drug trafficking

The value added tax (VAT) in Ecuador will increase from 12% to 13%, after Congress failed to reach an agreement, this Friday (9), to definitely stop an increase proposed by the government to finance the fight against drug trafficking.

On Tuesday, the National Assembly rejected an increase in VAT – permanently to 13% and temporarily to 15% – proposed by President Daniel Noboa, who later vetoed this decision by the Legislature.

The government sent a new document setting an increase to 13% and warned that it could modify the rate to 15% according to the country's economic needs.

The Legislature needed 92 of the 137 members of the assembly this Friday to ratify its initial plan to maintain VAT at 12%. However, the motion had only 78 votes in favor, the National Assembly reported on its account on the social network X.

Congress, where the official party is a minority, also failed to obtain the necessary votes to officially adhere to the presidential veto.

Without an agreement, Ecuadorian legislation establishes that the veto is accepted, causing VAT to increase from 12% to 13% once 30 days have been completed.

This tax is one of the largest sources of revenue for Ecuador and the 12% rate allowed a collection of around US$8.4 billion (R$41.75 billion), or 8% of GDP, in 2023.

With an increase to 15%, the maximum established by Noboa, the Executive could raise around US$1.3 billion (R$6.46 billion) additionally.

To finance the fight against around twenty gangs linked to drug trafficking, the Assembly approved that the financial system contribute up to 25% of the profits obtained in 2023 and that the Capital Exit Tax, currently 3.5%, be increased to a maximum of 5%.

The powerful Confederation of Indigenous Nationalities (Conaie), which participated in revolts that toppled three presidents between 1997 and 2005, opposed the increase, considering it will affect the economy of the poorest.