Brazil to slowly roll back tax breaks on cars next year

BRASILIA Tue Dec 24, 2013 11:46am EST

Vehicles are seen in a traffic jam during rush hour at Marginal Pinheiros in Sao Paulo July 22, 2011. REUTERS/Nacho Doce

Vehicles are seen in a traffic jam during rush hour at Marginal Pinheiros in Sao Paulo July 22, 2011.

Credit: Reuters/Nacho Doce

BRASILIA (Reuters) - The Brazilian government said on Tuesday it will gradually roll back tax breaks on cars next year, amid worries from producers that higher duties could hit sales in the South American country.

The government had previously announced it planned to return the industrial products tax, known as IPI, charged on cars and other products to the normal level as a way to make up for the billions of dollars in lost revenue that severely deteriorated Brazil's finances this year.

However, the government decided to raise the IPI tax on basic passenger cars to 3 percent from 2 percent starting in January, instead of an immediate return to the original rate of 7 percent as expected by many analysts.

Deputy Finance Minister Dyogo de Oliveira told reporters that in late June the government will analyze whether it will raise the tax back to 7 percent. He said the tax increase will depend on market conditions at that time.

In 2012, the government temporarily lowered the IPI tax on cars, furniture and home appliances in an attempt to jump start an economy that has struggled to grow in the past three years.

The increase in the IPI tax for both cars and furniture will mean an extra 1.146 billion reais ($482.91 million)in tax revenues until June 30, de Oliveira said.

Car makers in Brazil are worried that higher taxes and new obligatory safety standards will increase the value of cars and reduce sales in the world's fourth largest auto market.

Auto sales in Brazil are on track to shrink this year for the first time in a decade, as credit gets tighter and the government gradually winds down its stimulus.

Italy's Fiat SpA FIA.MI, Germany's Volkswagen AG (VOWG_p.DE) and U.S.-based General Motors Co (GM.N) and Ford Motor Co (F.N) sell more than 70 percent of new cars in Brazil.

De Oliveira said the government had not calculated the impact higher taxes would have on inflation, but said he did not expected the price transmission to be immediate.

(Reporting by Alonso Soto; Editing by Leslie Adler)

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