Governors raise general tax rate in an effort to recover revenue losses
02/03/2025
The movement to increase the general rate of the sales tax ICMS, Brazil’s main consumption tax, is not yet over. The average tax rate, which was 17.61% in 2022, is set to rise to 19.24% by 2025. This calculation includes all 26 states and the Federal District (Brasília), along with ICMS hikes approved in 2024 that will take effect by April this year in the states of Rio Grande do Norte, Piauí, and Maranhão. The trend of increasing rates began in 2022, and since then, at least 18 states and the Federal District have raised the ICMS rate at least once.
The highest standard ICMS rate, which was 18% in 2022, will increase to 23% starting February 23 of this year when the law raising the tax in Maranhão takes effect. With a five percentage point increase applied gradually since 2022, Maranhão’s ICMS has risen the most during this period, followed by Piauí’s tax, which will be 22.5% from April this year, up from 18% in 2022. States such as Amapá, Espírito Santo, Minas Gerais, Mato Grosso, Mato Grosso do Sul, Rio Grande do Sul, Santa Catarina, and São Paulo have not increased the standard ICMS rate since 2022.
In some cases, there have been attempts to raise the tax. For instance, the government of Rio Grande do Sul tried to pass a law in 2023 to ensure a higher rate in 2024 but withdrew the proposal. In the face of strong political opposition, Governor Eduardo Leite pulled back the proposal submitted to the Legislative Assembly of Rio Grande do Sul. The current modal ICMS rate for the state is 17%.
Due to the principle of annual anteriority, legislation to raise the ICMS rate must be approved in the preceding year. States also need a 90-day prior notice.
Carlos Eduardo Xavier, Secretary of Finance of Rio Grande do Norte, recalls that the state government attempted to raise the modal ICMS rate to 20% in 2023, to take effect in 2024. “The government faced a defeat in the Legislative Assembly. Last year, we managed to better organize our base and approved the 20% rate definitively.”
In 2022, the Rio Grande do Norte government increased the rate from 18% to 20%, effective for the following year, but the measure was temporary and only lasted until the end of 2023. Therefore, the modal ICMS returned to 18% last year. Among the “imperative issues” for reinstating the 20% rate, Mr. Xavier cites the need to restore revenue following the income losses since 2022.
In a statement, the Maranhão Department of Finance also said the restoration of lost revenue in 2022, when the federal government under Jair Bolsonaro imposed restrictions that reduced ICMS rates in key sectors such as electricity, fuels, and telecommunications for state revenue.
Until 2022, in most states, these activities paid ICMS above the standard or modal rate, which refers to the general rate set by states for the tax. The restrictions were introduced through Supplementary Laws 192 and 194, both in 2022. Rodrigo Spada, President of the National Association of State Tax Auditors (FEBRAFITE), said that these laws were based on precedents from the Supreme Court, which had already identified electricity and telecommunications as essential activities, exempting them from paying a higher-than-modal ICMS rate. He also said that fuels were included in the laws as well at a time when efforts were being made to combat inflation. At that time, gasoline and diesel prices followed the sharp rise in oil prices in 2022, shortly after Russia invaded Ukraine in the early months of that year.
This set of measures, Mr. Spada said, also resulted in a change in ICMS collection on fuels, shifting to the “ad rem” model, with a specific value per liter—for gasoline and diesel—and per kilogram for cooking gas, rather than applying the rate to prices.
According to the Maranhão Department of Finance, the restrictions on ICMS rates resulted in a monthly revenue reduction of approximately R$200 million. Despite cuts in costs and departmental budgets, a note from the state’s Finance Department said it was necessary to adjust ICMS rates to partially offset revenue deficits. The tax, which was 18% in 2022, rose to 20% during 2023, advanced to 22% in 2024, and will increase by another percentage point to 23% in February. “With the rate adjustment and improvements in the tax system, Maranhão’s revenue, when adjusted for inflation, will surpass the levels reached in 2022, allowing the state to make investments in infrastructure and finance public policies and social programs,” said the Maranhão Department of Finance.
Renata dos Santos, the Secretary of Finance for Alagoas, said that the state experienced “strong” revenue in 2023 and 2024 due to economic dynamism and law enforcement. In 2023, she recalls, a special tax installment program also boosted income. This performance, she said, contributed to the state not proceeding with rate increases. The Alagoas government raised the modal ICMS rate during 2023 from 17% to 19%, based on a 2022 law. Since then, there has been no increase in the modal rate. “There’s also a limit to taxing. When you tax too much, you end up increasing evasion,” she said. “Currently, there are no plans to raise the rate, but that depends on how ICMS revenue behaves this year. There are uncertainties about economic activity.”
Ms. Santos noted that the state, in addition to the 19% modal ICMS, has an additional 1% for the Poverty Eradication Fund (FECOEP). In Alagoas, she said, this additional charge has a broader base than in most states. For this reason, according to Ms. Santos, the state’s effective ICMS rate can be considered as 20%.
Helena Sayuri Roveri, a tax consultancy manager at Becomex, said that the additional FECOEP charge is levied by many states, but has a broader base in three of them: besides Alagoas with 1%, Rio de Janeiro with 2%, and Sergipe with 1%.
There are also other specific situations, Ms. Roveri noted. In Santa Catarina, she said, the general rate is 17%. However, internal operations in the state are taxed at 12% when conducted between taxpayers for goods intended for resale or manufacturing. This, she said, is a strategy to compete with the interstate ICMS rate of 12% and encourage companies to keep suppliers within the state.
According to the Secretary of Finance of Alagoas, even without an ICMS rate increase, the second half of the current term also comes with caution. A plan is being developed, she said, not only to boost revenue but also to cut expenses. “We’re studying contract revisions but without making blind cuts.” The idea, she said, is to analyze expenses “point by point,” evaluating travel and event costs, for example. “Expenses always need trimming,” she said. The aim is to ensure resources so that the government can fulfill investment promises made during the campaign.
According to Ms. Santos, ICMS revenue in Alagoas increased by 16% nominally in 2024, well above the 4.83% inflation rate measured by the IPCA. For 2025, she uses conservative projections and anticipates stability in real terms for federal transfers from the State Participation Fund (FPE). She projects a real increase of about 2% for ICMS revenue.
With the highest ICMS revenue in the country, São Paulo maintained the standard tax rate of 18%. Samuel Kinoshita, the São Paulo Secretary of Finance, said the government’s choice was to pursue other measures. He mentions the “Direção Certa” program, which includes cost containment, incentives for tax compliance, and a review of ICMS benefits. The state’s tax revenue grew by 8.2% in real terms in 2024 compared to the previous year, while there was an 8% decline in 2023.
*By Marta Watanabe — São Paulo
Source: Valor International