Textile manufacturers in Brazil will no longer have to pay a 20 percent payroll tax. This was among a basket of measures announced by the Government to protect the country's manufacturers from a rally of its currency, the Real.
The measures include a cut in taxes, tightening of trade barriers and increase in lending. The announcement was made by President Dilma Rousseff's Government after the country's industrial output declined 1.6 percent in June, which is the second biggest decrease since 2008. The contraction in industrial production is about four times more than that expected by analysts.
The Real has rallied 48 percent since the end of 2008 and 6 percent in the past six months, leading to a surge in imports from China. The increase in the value of Brazilian currency has led to increased complaints of excessive costs by businesses and a fall in the cost of imports.
The package of tax breaks called 'A Bigger Brazil' will cost 25 billion real or US$ 16 billion to the Government over the next two years. It includes a mandate to Government bodies to favour domestic suppliers, even if their bid is higher than the foreign firms.
The rollback of 20 percent payroll tax will be presently applicable to textile firms, shoe manufacturers, software companies, and furniture makers, according to Finance Minister Guido Mantega. He said that the benefit will be extended to other sectors and the Government will offset its loss by raising an additional 1.5 percent tax on companies' sales.
Besides the rollback of payroll tax, the Government has announced that exporters of industrial goods will be provided with tax credits equal to 0.5 percent of their exports, which would later be raised to 3 percent.
The Government further plans to quicken the repayment of credits owed to firms, tighten anti-dumping regulations, and continue the present tax breaks for a year on the purchase of capital goods.
The Finance Minister said that the Government will ask the countries in the Mercosur trade bloc, including Argentina, to hike duty on about 100 items as a measure to protect against cheaper imports.
The domestic demand has remained robust as Brazil last year registered the highest economic growth in two decades. But the currency rally is putting pressure on industrial production. While the manufacturing of consumer goods declined 2 percent in June, production of capital goods too fell 1.9 percent. Overall, 20 of the 27 industrial sectors witnessed a reduction in output during the month.
In May this year, the Sao Paulo Industrial Federation had forecasted that the country's trade gap in manufactured goods will widen to US$ 100 billion in 2011 from US$ 71 billion in 2010.
This trend was substantiated by a survey of 1,569 companies released recently by the National Industrial Confederation, which says that nearly 50 percent of Brazilian exporters lost their overseas market share in the past 12 months.
Fibre2fashion News Desk - India
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