Brazil Extends Tax Cut on Vehicle Purchases as Sales Plummet

Brazil’s government will prolong a tax cut on vehicle purchases as automobile sales fall and the economy slows in the world’s second-largest emerging market.

The government will extend through year-end the so-called IPI excise tax reduction, which was scheduled to expire tomorrow, Finance Minister Guido Mantega told reporters in Sao Paulo today. Levies on compact cars will remain at 3 percent, while the tax on most larger models will be 9 percent to 25 percent, he said.

Brazil’s automobile industry has pressured for government assistance this year, as prospects of reduced tax incentives and plunging exports to Argentina cut into sale expectations. Revenues have been further hampered by weakening consumer confidence and slowing economic growth.

“We have to take steps to make the second half of the year better,” Mantega told reporters after meeting with automobile industry representatives. “Sales were weak in the first half because of a series of factors including a decrease in credit.”

The tax incentive designed to entice Brazilians to buy new cars was introduced more than two years ago. Taxes on compact cars were scheduled to rise to 7 percent this year.

Brazil car sales fell 28 percent in the year through June 26, according to preliminary data from Brazil’s car dealership association Fenabrave. The report, which includes sales of passenger cars and light commercial vehicles, also showed a decline of 21 percent on the month.

Brazil’s economy expanded by 0.2 percent during the first three months of this year, half the pace of the previous quarter as family consumption fell 0.1 percent and investments contracted 2.1 percent.

The announcement comes as policy makers struggle to meet fiscal targets after the primary deficit in May ballooned to the widest since December 2008. The lower taxes will cost the government 800 million reais ($261 million) in lost revenue for the second half of the year, Mantega said.

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