The perception of pro-government congressmen is that the Senate proposals do not add up; they fear a negative reaction from the market
The Senate’s resistance to the proposals that the government presented to compensate for the maintenance of the payroll tax exemption for 17 sectors of the economy and municipalities is worrying government supporters in the National Congress. The perception is that the alternatives presented by the Upper House are not enough to restore the tax losses in revenue.
The government will seek to intensify dialogue with the President of the Senate, Rodrigo Pacheco (PSD-MG), in an attempt to approve compensatory measures, found the Poder360.
If there is no consensus and the math does not really add up, the tax break will be fully valid again for companies and city governments. The government will continue to benefit from the revenue. However, in addition to being weakened by the Legislature, there is internal concern about the market’s reaction to a possible return of the tax incentive.
The month of June was marked by fiscal uncertainty regarding the economic team of Luiz Inácio Lula da Silva (PT). The dollar had successive highs, which only increased after the president stopped questioning the need to cut spending and Minister Haddad announced an estimated savings of R$25.9 billion from a “fine-tooth comb” of social benefits.
The federal government estimates that the impact of the payroll tax relief will be R$ 26.3 billion in 2024. It is the sum of the waiver to the sectors (R$ 15.8 billion) and to municipalities (R$ 10.5 billion). This would be the maximum amount that needs to be compensated.
UNDERSTAND THE IMPASSE
Reducing the burden on a sector means that it will have a reduction or exemption from taxes. In practice, it makes hiring and retaining employees in companies cheaper. Defenders of the mechanism say that this type of practice stimulates the economy and promotes job creation.
President Lula’s government, however, wants to end the benefit. The more tax breaks there are, the lower the tax revenue. Haddad wants to balance the public accounts and eliminate the deficit by 2024.
In its eagerness to gain momentum to negotiate the end of the benefit with Congress, the federal government asked the Court to consider the waiver of the payroll unconstitutional.
Minister Cristiano Zanin, appointed by Lula, issued an injunction that suspended the benefit.
After Zanin’s provisional decision, the government reached an agreement with Congress. The tax relief for the sectors will be fully effective in 2024, but will gradually end in the following years until 2028.
O STF gave 60 days to approve measures to compensate for losses from the tax exemption. Only then can the agreement with Congress be reached. If the deadline is not met, the tax benefit ends.
Haddad tried to push through a provisional measure that would provide compensation through changes to PIS/Cofins credits. Business sectors quickly reacted and Congress returned the proposal. It was decided that the impasse would be resolved through the legislative procedure.
Read the chronological order of events:
- 13.jun.2023 – Senate Economic Affairs Committee approves extension of tax relief to 17 sectors. Haddad says “not understanding the rush” to vote on the topic;
- 25.Oct.2023 – Congress approves the postponement of tax waivers until 2027, including payroll tax relief for municipalities with up to 156.2 thousand inhabitants;
- 23.nov.2023 – Lula vetoes the measure;
- 24.nov.2023 – Haddad says he would present a “solution” for payroll tax relief after December 12, 2023;
- 14.Dec.2023 – Congress overturns Lula’s veto and tax exemption remains in place until 2027;
- 28.Dec.2023 – Haddad proposes a gradual re-taxation of the payroll via MP 1,202 of 2023, with effects from April 1, 2024;
- 27.Feb.2024 – Lula removes the payroll tax exemption from the provisional measure and sends the PL (bill) 493 of 2024with gradual re-taxation;
- 9.Feb.2024 – Chamber of Deputies approves constitutional urgency regime for re-taxation projects;
- 10.Apr.2024 – without an agreement with Congress, the bill on re-taxation had its urgency status removed;
- 24.Apr.20240 – AGU calls on the STF to consider the exemption unconstitutional;
- 25.Apr.2024 – STF minister, Cristiano Zanin considers the payroll and municipal tax exemption to be unconstitutional and overturns;
- 9.may.2024 – government and Congress reach an agreement to postpone the tax relief until the end of 2024 and have a gradual re-taxation until 2028;
- 15.may.2024 – government asks the STF to resume the payroll and municipal tax exemption;
- 17.may.2024 – STF grants 60 days for the government and Congress to find financing of R$26.3 billion for payroll and municipal tax relief in 2024;
- 4.jun.2024 – Ministry of Finance releases a provisional measure that limits the use of PIS/Cofins credits, which would result in up to R$29 billion for the Union;
- 5.jun.2024 – sectors and Congress criticize the measure;
- 11.jun.2024 – President of the Senate, Rodrigo Pacheco (PSD-MG) returned parts of the MP and discussions restarted;
- 13.jun.2024 – Haddad says he will listen to senators’ proposals on compensation.
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