October 19, 2016 / 11:57 PM / 3 years ago

Colombia sends long-awaited tax reform bill to Congress

BOGOTA (Reuters) - Colombia’s government on Wednesday presented to Congress a tax reform bill that seeks to raise billions of dollars in the coming years to make up for lost oil revenue and preserve its investment grade credit rating.

Colombian Finance Minister Mauricio Cardenas speaks on a panel at the annual meetings of the IMF and World Bank Group in Washington, October 6, 2016. REUTERS/James Lawler Duggan

The reform, which must be approved by year-end to kick-in next year, will raise value-added tax to 19 percent from 16 percent, excluding basic products like food and medications.

It also seeks to widen the base for income tax contributions to add an additional 440,000 citizens and establishes 4 to 9 year prison terms for tax evasion.

The reform will lower income tax on businesses to 32 percent beginning in 2019, down from the 43 percent they would pay in coming years without the reform, Finance Minister Mauricio Cardenas said. Companies currently pay 40 percent income tax.

The reform, which will bolster revenue by 0.8 percent of gross domestic product - or $2.4 billion - in 2017, is seen as crucial to preserving Colombia’s BBB investment grade credit rating and is needed to fund anti-poverty programs. Revenue will reach 3.2 percent of GDP by 2022, Cardenas said.

“This reform will allow us to keep investor confidence and acquire more resources to improve Colombians’ lives,” said Cardenas. “We could raise our rating to triple B+.”

The reform comes as the government copes with the fallout from the shock rejection early this month of a peace deal with the FARC rebels that shook investor confidence.

The proposal faces an uphill battle. The government’s coalition usually has a congressional majority, but opposition lawmakers have expressed reservations.

Standard & Poor’s warned that the failure to approve the peace deal and an economic deceleration meant it could make it harder to pass key fiscal reforms.

“The reform is probably very ambitious,” said Camilo Perez, chief economist at Banco de Bogota. “The big challenge is passing the original version and preventing it being watered down.”

Oil revenue has all but disappeared as the global price of crude plunged over the last year. Economic growth has slowed to an estimated 2.5 percent, from 3.1 percent in 2015.

Cardenas has widened the national government’s fiscal deficit target to 3.9 percent of GDP from 3.6 percent.

Congress on Wednesday approved a $77 billion budget for next year, an increase of 5 percent over 2016.

Reporting by Carlos Vargas; Writing by Helen Murphy and Julia Symmes Cobb; Editing by Bernard Orr & Shri Navaratnam

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