RPT-Mexican tax reform to avoid sales tax on food, medicine-officials

Sat Sep 7, 2013 11:53pm EDT

MEXICO CITY, Sept 7 (Reuters) - The Mexican government has decided against levying a controversial sales tax on food and medicine as part of a key fiscal reform it will present on Sunday, officials in the ruling Institutional Revolutionary Party, or PRI, said on Saturday.

The government is aiming to boost Mexico's weak tax revenues by around 4 percentage points of gross domestic product (GDP), and was seriously considering widening the application of value added tax (VAT) to include food and medicines.

This was viewed as a risky measure politically though because of the impact it would have on the poor, who make up roughly half of the population in Latin America's No. 2 economy.

The economy suffered a surprise contraction in the second quarter, prompting fears higher taxes would drag on an eventual recovery.

Recent street protests over other reforms aiming to open up the oil industry to foreign capital and overhaul a failing education system undertaken by President Enrique Pena Nieto have stirred fears of social unrest in Mexico, prompting a more cautious approach.

Earlier on Saturday, Finance Minister Luis Videgaray briefed some PRI members of Congress on the planned fiscal reform.

Afterwards several PRI officials, speaking on condition of anonymity, told Reuters that the government had decided to opt against levying VAT on food and medicine.

Economists say broadening the application of VAT would be one of the most effective ways of raising tax revenues, and the PRI in March changed its manifesto to end the party's longstanding ban on imposing the levy on food and medicine.

The government has never said explicitly it would apply VAT to food and medicines but had not ruled it out either.

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