Colombian Treasury Minister Alberto Carrasquilla will present the government’s tax reform proposal to Congress today. Reform attempts in 2020
Colombian Treasury Minister Alberto Carrasquilla will present the government’s tax reform proposal to Congress today. Reform attempts in 2020 have been put on hold due to COVID-19.
The Colombian economy has contracted sharply since the start of the pandemic and the current budget deficit is around 9%. The government hopes to increase revenue through tax reform, including removing some exemptions from value added tax (VAT). If the government fails to pass meaningful reform, Colombia’s sovereign credit rating risks a severe drop. This could trigger capital flight, further hampering economic recovery.
The ruling Center Democratic Party of Carrasquilla holds less than 20% of the seats in Congress and needs the support of other parties to push through the reform. The severe weakening of the legislation to appease them risks effectively reversing the reforms, leaving the possibility of a deterioration in credit. In 2018, efforts to remove food exemptions sparked an outcry and the measures were relaxed by lawmakers, underscoring the conflicting nature of the reform of the VAT exemption. If the Democratic Center left in place VAT exemptions for food, commodities and health care, the party could garner enough votes. If this fails, Colombia’s credit rating will likely drop, jeopardizing the Democratic Center’s chances of retaining the presidency in the next elections in 2022.
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