President Luiz Inácio Lula da Silva’s government (PT) will forgo collecting R$ 543.7 billion by 2025 through the granting of tax benefits to companies and individuals. This amount represents an increase of R$ 20 billion compared to the projected tax exemptions for 2024. The estimate was submitted to Congress as part of additional information accompanying the 2025 budget bill, revealing the significant scope of tax breaks to be implemented over the coming years.
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Tax Exemptions and GDP Impact
The projected tax waivers represent 4.4% of the Gross Domestic Product (GDP) and account for 19.7% of all the taxes and contributions the Brazilian Federal Revenue Service expects to collect in 2025. This considerable percentage highlights the substantial impact that tax incentives have on the national budget, as they reduce the government’s ability to generate revenue during a critical period of fiscal adjustment and efforts to stabilize public accounts.
Simples Nacional and Small Businesses
The Simples Nacional, a simplified tax regime designed for micro and small businesses, tops the list of the largest tax exemptions, accounting for 22.25% of all the incentives granted. For 2025, the budget proposal forecasts a total exemption of R$ 121 billion linked to the Simples Nacional. Of this total, R$ 106.64 billion pertains to companies in the commerce and services sectors, while R$ 14.4 billion is associated with industries.
Benefits for the Agricultural Sector
Second on the list of tax exemptions are incentives aimed at the agriculture and agribusiness sectors, with a projected amount of R$ 83.5 billion in 2025, representing 15.28% of total tax waivers.
Extra Revenue Needed to Close the Fiscal Gap
The government has projected that it will need R$ 166 billion in extra revenue to close the 2025 budget and meet the zero-deficit target set for next year. To achieve this goal, the economic team, led by Finance Minister Fernando Haddad, is betting on a series of measures aimed at increasing revenue, especially through programs targeting large taxpayers.
Tax Settlement Program (PTI)
The government’s main strategy to boost revenue is the new Tax Settlement Program (PTI), targeting the largest companies in the country. The program, which could generate over R$ 30 billion in additional revenue by 2025, was launched through a Finance Ministry decree. The initiative seeks to resolve large-scale tax disputes involving the payment of taxes. Through the settlement, taxpayers can negotiate the terms of the agreement to regularize their fiscal situation, thereby ending ongoing tax litigation.
This strategy is seen as a way to increase revenue efficiently without the need to raise taxes or create new levies, which could be politically sensitive. By resolving tax disputes and allowing large taxpayers to settle their debts, the government hopes to inject significant resources into public coffers while also providing legal certainty for the companies involved.
Analysis:
While tax waivers are a valuable tool for fostering growth in strategic sectors like small businesses and agribusiness, they also create challenges for maintaining fiscal balance. As the volume of these exemptions increases, the government will need to ensure it can generate sufficient revenue to support public services and investments without exacerbating national debt. Achieving the zero-deficit target will depend on the success of new initiatives, such as the tax settlement program, and the ability to identify alternative revenue streams that offset the growing cost of tax waivers.
The ongoing tax reform, currently under debate in the Chamber of Deputies, could have a significant impact on the structure of tax breaks. By simplifying the system and consolidating multiple taxes into a single Goods and Services Tax (GST), the reform aims to increase collection efficiency, reduce loopholes, and limit the opportunities for sector-specific exemptions. This would not only broaden the tax base but also make the system more equitable and transparent.
By streamlining the tax code, the reform could alleviate some of the fiscal pressures caused by widespread tax waivers. It could help balance the government’s need for revenue with its commitment to fostering economic growth, potentially easing the negative budgetary impact of extensive tax breaks. In the long run, a more efficient and less distortionary tax system could better support sustainable economic development.
