42% of VAT collection in 2023 came from businesses in the commerce sector, whose sales have reported declines since July 2023.
Referential image of consumption in a supermarket in the north of Quito, January 26, 2024.
If the proposal of the Government of Daniel Noboa is approved, to increase the Value Added Tax (VAT) from 12% to 15%, most of the collection would come from the sales of businesses in the commerce sector.
Due to trade activities, the Internal Revenue Service (SRI) collected USD 3,557.5 million from VAT in 2023; This is 42% of the USD 8,444 million collected by this tax.
According to the Ministry of Production, there are some 586,503 companies in the commerce sector, of these, 96% are considered microenterprises.
And, although they are not happy with the measure, the Chambers of Commerce of Guayaquil and Quito have already said that they support the measure if it is temporary and if the resources will be used to combat crime, since insecurity has caused drops in sales.
According to Noboa, if the VAT increases by three points starting in March 2024, the State would receive additional income of USD 1,071 million until December. And, in a full year, the increase would be USD 1,306 million.
However, the Economic Development Commission of the National Assembly has proposed that the three-point increase be temporary, for two years, and that it be increased permanently by only one percentage point; that is, 13%.
The director of the Internal Revenue Service (SRI), Damián Larco, has mentioned that the increase of a single percentage point in VAT could leave an additional USD 400 million per year.
The Director of Research at the Business Intelligence consultancy, Juan Javier Jarrín, explains that beyond the points that are increased, the most important thing is that the State will receive more resources immediately, as soon as the law is approved.
And he adds that, in this way, the million-dollar resource deficit that has put the State in trouble to even pay public sector salaries would be reduced.
According to Jarrín, the deciles with the lowest incomes of the population mainly consume products from the basic basket that have 0% VAT. Hence there should not be a blow to the lower class.
VAT increase could affect consumption
But, on the other hand, the VAT increase could further deepen the decline in sales in the commercial sector, which already had a bad 2023, due to the security crisis, political uncertainty and blackouts, says the economist and rector of Tecnológico Argos, Jorge Calderon.
According to Calderón, the increase in VAT is a disincentive to consumption, so businesses could have fewer sales in 2024. And lower consumption would cause Ecuador’s Gross Domestic Product (GDP) to continue decelerating, he adds.
For example, VAT would increase for products such as gasoline and lunches, which are consumed by the middle-class population.
Calderón adds that when these types of measures are announced, another problem is that there is always a speculative effect, and the authorities are unable to control it.
“Even if they are offered incentives to hire more staff, companies that sell less have less income and will not be able to hire more people,” adds Calderón.
Juan Carlos Díaz Granados, executive director of the Guayaquil Chamber of Commerce, recognizes that VAT, being a transversal tax, “will hit the entire consumer chain, which will cause sales to slow down a little.”
Díaz Granados also says that insecurity has hit the sector in 2023 and they are concerned that this will be repeated in 2024.
“This situation puts the consumer under tension and affects their consumption patterns. When there is an event of great shock, people take refuge in their homes and prefer to postpone certain consumption,” he details.
The commerce sector reported local sales of USD 78,489 million between January and November 2023. This is a slight increase of 1.3% compared to the same period in 2022.
But a slowdown is already seen, since local business sales had grown 14% in 2022 compared to 2021.
So far in 2024 it can be seen that consumption continues to suffer, in the midst of a state of exception and curfew that forces businesses to close earlier.
According to the SRI daily collection report, USD 767 million have been collected from VAT between January 1 and 22, 2024.
This is a figure 2.3% lower than the USD 786 million collected in the same period of 2023.
Industries also weigh on VAT
Sales from manufacturing industries are also among those that will contribute the most to VAT collection if the tax rate is increased.
The SRI collected USD 1,344.7 million in VAT from sales of industries in the manufacturing sector in 2023. This collection represents 16% of the total VAT in 2023.
The main unions in the industrial sector have also supported the proposal to increase VAT, as they consider that this effort is required so that the State has more income to combat drug trafficking.
” The security crisis must be solved first so that businesses can reactivate and sell more,” says Andrés Robalino, executive director of the Chamber of Industries, Production and Employment of Cuenca.
Robalino recognizes that there will be some industry products that could have price increases, because they are made with imported raw materials, which will have more VAT.
However, the increase in prices will depend on the weight of the raw material in the product. For example, there are goods in which imported raw materials represent 40% of the final product and others only 1%, says Robalino.
And he adds that the price increases will be paid by consumers, but especially those with more purchasing power.
According to Robalino, the most expensive products that are not frequently purchased by households with fewer resources will be the ones that will increase in price the most and could be in lower demand, such as cars, for example.
María Paz Jervis, president of the Chamber of Industries and Production (CIP) has said that the increase in VAT should not lead to higher inflation, because when VAT increased to 14% due to the earthquake, there was no increase in inflation. .
Jervis also said that although the industrial sector supports the measure, the Government is required to implement other actions such as:
- Targeting of subsidies.
- Reduction in the size of the State and optimization of spending.
- Fight against smuggling and evasion.
