Tuesday, November 29, 2016

The Colombian government at a crossroad with the tax reform

The project that increases taxes on ICT was rejected by the sector. But the initiative is being debated in parliament at the same time as the new agreement with the FARC. And, in the face of the 2018 presidential elections, even lawmakers hesitate to approve unpopular measures such as the VAT increase.

The finance minister, Mauricio Cárdenas, in early November presented the project of the structural tax reform, with which the government of President Juan Manuel Santos argues that it seeks simplicity and equity to the tax system. The initiative was filed with the Secretary General of the House of Representatives as a matter of urgency, in order for Congress to approve the law before the end of the year. The government's argument to defend the urgent nature of the project is that if the reform is not done, the tax revenue will go from 15% of the Gross Domestic Product (GDP) in 2016 to 14.9% next year, thus continuing a slowdown that would reach 13.5% of GDP in 2022. Economic forecasts drive the need for the reform. Several analysts agree that the performance of GDP next year will be better than 2016 but that growth would not be as good as meeting the 3.5% target set by the Ministry of Finance. The market expects, on average, a 2.6% growth for 2017. The controversial point of the reform is the VAT increase from 16% to 19% progressively over the next three years. In addition, higher taxes are expected on income, fuels, and cigarettes. In addition, penalties are hardened to evaders, including jail.

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