Peru plans tax cuts to spur growth, cool inflation


By John Quigley

Peru’s finance minister Ismael Benavides, expects the tax reduction to have an impact on inflation.  (Photo: Vidal Tarqui/Andina)

Peru’s government agreed to reduce the sales tax to boost growth and slow inflation, which accelerated the most in 27 months in January, Finance Minister Ismael Benavides said.

The government will seek to lower the sales tax to 18 percent from 19 percent and cut a tax on bank transactions, Benavides told reporters today in Lima. Rising tax revenue from increased domestic demand and higher metal and gas exports will offset the impact of tax cuts on the public finances, Benavides said.

“The state is returning resources it has in excess and which are going to have direct impact on the population, especially the poorest,” Benavides said. “We expect it will have an impact on inflation.”

The risk of rising consumer prices stemming from the higher cost of food and crude oil imports is the South American country’s biggest concern this year, Benavides said Jan. 24. The annual inflation rate may rise to the top of the central bank’s 1 percent to 3 percent target range this year, from 2.17 percent last month, he said today.

Tax collection rose 21 percent last year from 2009 to 64.5 billion soles ($23.3 billion) on economic growth and surging copper and gold prices, according to state tax and import duty collection agency Sunat.

Peru’s sales tax was raised to 19 percent from 18 percent in 2003 during the government of Alejandro Toledo, who is leading polls before presidential elections in April. The proposed tax cut could create fiscal problems for the next government, Toledo said today in an e-mailed statement.

South America’s sixth-largest economy is likely to grow 8 percent this year, bringing in more tax revenue than expected, Benavides said. The government budgeted for 2011 economic growth of 5.8 percent, he said.

January’s tax collection was “much higher” than the government was expecting, Benavides said.

Higher prices for the country’s metal exports and food and fuel imports will likely boost tax collection by $1.16 billion this year, allowing the government to “easily” absorb the cost of the tax cuts, he said.