Selective tax delay could raise levy on goods and services
Priscila Faricelli
Nilani Goettems/Valor
President Luiz Inácio Lula da Silva’s government has until the end of this week to issue a provisional presidential decree setting the rates for the Selective Tax if it wants the levy to take effect on Jan. 1, 2027. The tax is subject to a 90-day waiting period between publication of the measure and the start of collection.
The chances that the measure will be postponed until after the elections, however, have increased amid concerns within the government’s political wing that the opposition could use the issue against Lula during the campaign. A delay until November could create distortions across sectors and lead to a higher rate for the Contribution on Goods and Services (CBS).
The Selective Tax was created under Brazil’s consumption tax reform and is scheduled to take effect in 2027. It is designed as a regulatory tax aimed at discouraging consumption of goods and services considered harmful to health or the environment.
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It will apply to vehicles; boats and aircraft; cigarettes and other tobacco products; alcoholic beverages; sugary drinks such as soft drinks; mineral products; and betting contests and fantasy sports, including online betting, which the government has banned.
The tax rates and collection rules were left to be defined this year through ordinary legislation so that collection could begin in 2027. The government chose instead to use a provisional decree because the 90-day waiting period begins as soon as it is published.
As of last week, however, no final decision had been made on when the measure would be issued. The final call rests with President Lula. For collection to begin on Jan. 1, the provisional decree must be published by Friday (Oct. 2).
Government officials privately acknowledge that the proposal could slip into November despite efforts by the Finance Ministry to reach agreements with affected industries and ease its passage through Congress.
The ministry still wants the measure published in September so collection can begin in January, while the government’s political wing favors waiting until after the election runoff to avoid hurting Lula’s performance in the race.
Revenue impact
Meanwhile, economic officials have begun assessing how to address the revenue impact if the Selective Tax measure is delayed.
The 2027 annual budget bill sent to Congress projects R$42 billion in revenue from the tax next year. That estimate assumes taxable events will begin in January, with revenue reaching the National Treasury from February.
If the provisional decree is issued in November, for example, the tax could only begin to be charged in February, depending on the publication date, with the money reaching government coffers in March. The government would therefore lose one month of Selective Tax revenue.
One possibility under discussion, Valor has learned, is to offset the shortfall by raising the CBS rate.
The CBS is the federal tax created by the reform that will replace, starting Jan. 1, the Social Integration Program (PIS), the Contribution for Social Security Financing (Cofins), the tax on insurance-related financial transactions, and part of the Tax on Industrialized Products (IPI).
Other solutions are also being considered. Officials have discussed adopting a transitional mechanism if the Selective Tax is delayed. Such a move could require legislative changes, potentially through another provisional presidential decree.
No proposal has been finalized, and discussions are taking place privately because of the sensitivity of the issue.
CBS calculation
Brazil’s Federal Audit Court (TCU) is also waiting for the Selective Tax measure, or another transitional solution, before proceeding with the calculation of the CBS rate.
The Selective Tax rates feed into that calculation because the tax reform requires the overall tax burden, as a share of gross domestic product (GDP), to remain stable during the transition between the old and new systems. That calculation takes into account revenue from both the CBS and the Selective Tax in 2027.
A delay in collecting the Selective Tax would therefore affect the CBS rate.
Luiz Gustavo Bichara, founding partner at Bichara Advogados, said delaying the Selective Tax would end up hurting sectors that were not meant to be affected by it.
“The reform has a rule requiring the tax burden to remain stable, meaning that revenue from the CBS plus the Selective Tax must correspond to current revenue. Without the Selective Tax, the alternative is to increase the CBS burden. In other words, society will bear the cost of the Selective Tax through a higher CBS,” Bichara said.
Sector distortions
Beyond the impact on the CBS calculation, a delay could create distortions between industries.
Products considered harmful to health, such as cigarettes, would face lower taxation in January unless a transitional solution is adopted. Those goods are currently subject to the IPI, whose rates will be reduced to zero for most products from Jan. 1. Without the Selective Tax or another offsetting measure, their overall tax burden would fall.
Marcello Baird, advocacy manager at health-focused nongovernmental organization ACT Promoção da Saúde, said such a scenario would be a public-health disaster.
“Obviously the government would lose revenue, but the main issue here is health. There would be a considerable reduction in the tax burden and therefore an incentive for cigarette consumption in the first months of 2027,” Baird said.
Companies producing goods subject to the Selective Tax would also have an incentive to build inventories in January, when the tax would not yet apply, before the levy takes effect later.
“They will concentrate sales at the beginning of the year to maximize profits and face a much lower tax burden than they do today,” he said.
Baird said research shows that the public tends to support taxes on products harmful to health. In his view, the government’s electoral concerns could be addressed through an effective communication campaign, allowing the provisional decree to be published in September.
Legal uncertainty
Priscila Faricelli, a partner at law firm Demarest Advogados, pointed to another risk: the government could issue the provisional decree only for Congress to fail to approve it, creating significant legal uncertainty.
“This is a very sensitive point because, if the rates are set by provisional measure and the measure expires, there will be a rush by companies to seek refunds,” Faricelli said. “We could end up with payments made under that provisional measure and taxpayers later asking for that money back.”
Bichara criticized the government’s delay in reaching a definitive solution for the Selective Tax.
“We are practically in October, we don’t know next year’s tax rate and, to make matters worse, that rate could still change during the year depending on what Congress decides on the Selective Tax. How can companies prepare without knowing the tax they will have to pay two months from now?” he said.
The Finance Ministry and the presidential office did not respond to requests for comment.
