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UPDATE 1-Colombia gov't dilutes tax proposal, cuts revenue target

(Adds government comment, figures)

BOGOTA, Nov 28 (Reuters) - Colombia’s government on Wednesday said it has modified its tax reform proposal, nearly halving its original revenue target, and forcing it to freeze spending to meet fiscal goals as it seeks to satisfy credit rating agencies.

After days of discussion in congressional committees, Finance Minister Alberto Carrasquilla said the revenue goal to fund next year’s budget will be 7.5 trillion pesos ($2.3 billion), considerably lower than the 14 trillion pesos in the original bill sent on Oct. 31.

Amid fierce opposition, the government withdrew a proposal to tax basic foodstuffs. Instead the finance ministry will freeze 6.5 trillion in 2019 spending, Carrasquilla said, though he gave no further details about what programs will be affected or where eventual funding for them might be found.

Voting on the proposal is likely to begin within days.

The controversial bid to place value-added tax on basic food had been the backbone of Carrasquilla’s plan to raise the bulk of the revenue in the reform, known as the financing law.

The VAT plan was roundly criticized for being a tax on the poor that would stoke inflation.

Carrasquilla told reporters on Wednesday he would not resign, denying speculation from lawmakers this week that he would stand down before year-end.

Government and congressional sources told Reuters earlier on Wednesday that the idea of raising the 2019 fiscal deficit target from 2.4 percent is being studied, along with adjusting the so-called fiscal rule.

The fiscal rule aims to cut the central government deficit to 1.0 percent of GDP in 2027.

But Carrasquilla sought to quash the idea that the target may be modified.

“We are in line with the already planned fiscal trajectory,” he said.

Changes to the deficit may not be looked at favorably by credit rating agencies, which want it reduced and have called for a deep structural tax reform.

Moody’s revised the outlook on its Baa2 rating to negative from stable in February. That followed a S&P’s decision to downgrade Colombia’s credit rating in December to BBB-, one notch above junk, citing concerns over the government’s ability to adequately cut the fiscal deficit.

Among the provisions in the reform are an income tax increase on middle-class and high earners, a reduction in business taxes and measures to combat evasion.

The bill will also lower taxes for foreign investors in local Treasury bonds from 14 percent to 5 percent.

$1 = 3,274.47 Colombian pesos Reporting by Carlos Vargas, Nelson Bocanegra and Helen Murphy; Editing by Richard Chang and Lisa Shumaker