How will tax reduction affect consumers in Peru? Experts comment.

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By Emily Finn
LivinginPeru.com

peru
Finance Minister Ismael Benavides. (Photo: Vidal Tarqui/Andina)

Peru’s congress voted this week to reduce the country’s general sales tax (whose Spanish acronym is IGV) from 19 to 18 percent, in an attempt to spur growth and cool inflation. But what exactly will the economic effects of the measure be?

Finance Minister Ismael Benavides said that a further reduction of the IGV could follow in the coming months depending on how the economy evolves, taking into account prices of major exports and state spending.

“This combination of factors will allow us to continue to reduce the IGV, making the economy more efficient. An optimal IGV level is between 14 and 15 percent,” Benavides told El Comercio. President Alan García added that the 1 percent cut could mean hundreds or even thousands of soles in savings for families over the course of a year.

Benavides expressed confidence that sellers would lower prices in response to the tax cut. But not everyone shares his view.

According to Eduardo Morón, professor at the Universidad del Pacífico and ex-vice minister of the economy, the IGV reduction will not cause prices to fall.

“In Peru, prices are calculated to include the IGV. The most probable outcome is that all the savings from the tax reduction will simply serve to increase the seller’s margin,” he said, though he clarified that savings would reach the final consumer in the case of certain goods and services like airplane tickets.

According to César Peñaranda, executive director of the agency for economy and business development of Lima’s chamber of commerce, the public will directly benefit from the IGV reduction in services like water, electricity and telecommunications. He added that gasoline prices might also drop, but a reduction of prices of goods sold in stores and supermarkets is doubtful.

“What’s certain is that the tax cut will allow these resources to remain in the private sector, whether it’s at the level of the producer or the consumer, instead of in the hands of the government. Any economic agent — business owner or consumer — will have his or her own use for the resources. Consumers will have more for increased consumption or savings, and business owners will have extra capital for investment or hiring additional workers,” Peñaranda said.

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