An economic analysis of the Brazilian value-added tax

Abstract

The basic objectives of this study are to evaluate, in the light of the value-added tax theory and nature, the Brazilian experience with this form of taxation. Conceptually, under the value-added tax (VAT), only the net output of the business enterprise in the production distribution process is subject to taxation. The tax liability is separately identified as the product and goes to the final marketing stage through the use of a system of "tax credits." Although the adoption in practical terms of the value- added concept is recent, it was first suggested as early as 1918. In most cases it has been suggested to replace the cumulative turnover tax. In Brazil the transformation of the state turnover tax into the value-added tax was part of the government effort to improve and modernize the whole Brazilian tax structure. The case for adopting the VAT was strongly influenced by the "built-in" anti-evasion device provided by the tax credit device and by the fact that a single-stage tax would worsen the distribution of tax revenues among the states. The adoption of the value-added tax did change the allocation of revenue pattern, with the balance leaning toward the producing states. The impact was, however, greatly reversed by the intergovernmental transfer program. The Brazilian state value-added tax is the most important form of. taxation affecting the agricultural sector. The nondeductibility of purchases of farm equipment or depreciation from the tax base make this tax resemble more closely the gross income type-of VAT which discriminates against investment expenditures. Thus, the ICM might be an important element impairing the modernization of the Brazilian farm sector. In relation to exports, one of the basic objectives of the VAT is to eliminate price distortions caused by indirect taxes. Therefore, the imposition of the tax at a high rate on exports clearly decreases the competitiveness of Brazilian products in the world market.