Lula Extends Fuel Exemption, But Price Should Rise in January; comprehend

President Luiz Inácio Lula da Silva (PT) decided to extend the exemption from federal fuel taxes (PIS/Cofins e Cide) and signed, Sunday night (1st), an Interim Measure (MP) which renewed l petrol tax exemption for two months. On diesel and cooking gas, the prime minister of the Civil House, Rui Costa (Pt), said that the exemption will be indefinite.

The measures were adopted in 2022 by the current president, Jair Bolsonaro (PL), and would expire on Saturday (31), the eve of the presidential inauguration.

The deputy goes against the will of the Minister of Finance, Fernando Haddad (PT), who envisaged the return of part of the collection at the very beginning of the new government (the tax exemption to extend the exemption to the whole year is R $52.9 billion). What weighed on Lula’s assessment was the political strain that would have been generated, already in the early days, with the impact of the increase in fuel prices at distributors (and inflation).

The price of petrol could increase by R$0.69; diesel, R$0.33; and ethanol, R$0.26, with the end of the federal exemption. The calculation is from the Brazilian Center for Infrastructure (CBIE), by consultant Adriano Pires, who was even nominated in March 2022 by Bolsonaro as president of Petrobras (PETR3;PETR4), but withdrew amid allegations of conflict of interest.

There were also fiscal and macroeconomic issues at play. The Budget approved by Congress last week provides for the continuation of federal tax cuts in 2023, but the measure costs R$52.9 billion. Additionally, a report from XP points out that tax returns would raise the extended consumer price index (HICP) by 0.51 percentage points this year.

“I, in particular, defend that it has at least an extension until we get in to see how Petrobras’ fuel pricing policy is going. Because the problem is not the tax issue, it’s Petrobras’ pricing policy, it’s the dollarization that has occurred,” PT President Gleisi Hoffmann said in an interview with GloboNews last week.

Change in ICMS

Despite Lula’s decision, the beginning of 2023 should still be characterized by a scenario of high fuel pricesdue to the recomposition of the ICMS (state tax which is the main source of revenue for governors and which had its rate limited after the articulation of the Bolsonaro government last year, a few months before the elections).

The increase in the ICMS is expected with the end of the way the tax has been charged in recent months. Congress approved complementary laws 192 and 194, with the support of the Bolsonaro government, and limited the tax rate to contain the increase in fuel prices on the eve of the elections.

The laws allowed for an artificial reduction in taxation (and prices), but affected the state’s collection, which challenged the Federal Court’s (STF) changes. Complementary Law 194, for example, turned fuel into necessities and capped state rates to the ICMS minimum (which was 17% or 18%, depending on the state).

But, to address the revenue losses, 11 states passed laws increasing the ICMS modal rate (the lowest chargeable) effective January 1. The increase ranges from one to four percentage points: this is the case of Sergipe, where the minimum rate has gone from 18% to 22% and will allow the state government to increase the tax on fuel.

For the institutional director of the National Committee of State Secretaries to the Treasury (Consenfaz), André Horta, it is not a question of raising the tax, but of returning to what was in force before, since the modification of the ICMS was unconstitutional. “This is not fundraising.”

Change at Petrobras

The government’s expectation is that the future president of Petrobras, Jean Paul Prates, announced by Lula on Friday (30), will promote a price reduction practiced by the state-owned company in refineries, which will partially offset the effect of the end of the exemption of federal taxes. Lula again said on Thursday (29) that prices will fall under the new management of the company.

The dilemma for the government was what to do until then with the exemption of PIS/Cofins and Cide: end the exemption now or make the change at a not so abrupt speed. One problem is that it could take more than 30 days for Prates to take over Petrobras.

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The “good news” – so far – is that the price of a barrel of oil, which cost more than US$100 when Bolsonaro made the exemptions, is now around US$86.

“The government can reduce the price at the Petrobras refinery for gasoline and diesel so that there are no increases with the return of taxes,” Pires says. But the CBIE director warns that the scenario of falling prices in the international market could change, even by easing the zero covid policy in China.

“This opening up of China could trigger, in 2023, another boom in commodities – including oil – with an impact on prices,” warns the consultant. According to him, the government should end the exemption for petrol and extend that for diesel until March, to see how inflation behaves.

Bolsonaro’s weapon

The increase in fuel prices was used by Bolsonaro and the then Minister of Mines and Energy, Adolfo Sachsida, as a weapon against Lula before he took office. In a live broadcast on social media on Friday (30), the president accused his successor of wanting a return to price increases.

“Everything was planned in the Budget for federal taxes to continue to be zero next year, but the new government wants federal taxes to be charged again starting in January. So, by all indications, gasoline is up almost R$1 since January 1 now. It is the new government, not ours,” Bolsonaro said live.

Sachsida did the same on social media: “Due to the determination of the new government, we will not be able to issue a parliamentarian to extend the exemption. What does it mean? It means that Lula, the PT government, has opted for an increase in the price of petrol, diesel and ethanol on January 1st”. On Thursday (29), Lula had accused Bolsonaro of wanting to “load the increase in fuel prices onto the shoulders” of the new government.

(With Estadao content)

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