The increase in the value added tax (VAT) from 12% to 15% to finance the fight against the violence that Ecuador is currently experiencing, proposed by the Organic Law project to deal with internal armed conflicts, social and economic crisis, provokes reactions in the private sector and opens a discussion on whether this was the most appropriate funding measure and how to ensure that the revenue is earmarked for security and not for other government expenditure.

With this law sent by President Daniel Noboa to the National Assembly on Thursday, January 11, the regime seeks to generate an increase in the collection of this tax of $1.071 million in 2024, taking into account that the increase would be applied from March 1, as stated in documentation attached to the presented project. And that would raise an additional $1.306 million in the full year, according to projections by the Internal Revenue Service (SRI).

VAT of 15% proposed by the Government in a new urgent project to deal with internal armed conflicts, social and economic crisis

For Mónica Heller, president of the Federation of Ecuadorian Chambers of Commerce and the Chamber of Commerce of Quito, the increase in taxes is necessary to face the crisis of insecurity that the country is going through, however, she pointed out that the efforts must also come from the state, not only from the citizens.

“I understand that paying more taxes is an effort for everyone, but it is necessary to face the crisis that the country is going through. However; In order for this adjustment to be acceptable to the citizens, it must be accompanied by a reduction in government current spending, the direction of subsidies and fiscal transparency,” said the businessman.

For his part, Alberto Acosta Burneo, editor Weekly analysishe assured that a three-point increase in VAT as a planet Government is equivalent to withdrawing about 2000 million dollars from citizens’ pockets, liquidity that could be used for investment, construction or savings and instead finance “growing public spending.” and unstoppable” in an environment where the economy is slowing down, noting that in October 2023 sales decreased by about 2%.

Acosta analyzed how the VAT increase is an expensive alternative, warning that it is a regressive tax that affects the poorest the most. For the expert, there are other alternatives to financing the conflict and he agrees with Heller in citing, for example, the targeting of fuel subsidies. “The targeting of fuel subsidies doesn’t affect the poorest and that’s the difference, so there are alternatives that are not regressive, that won’t have as much of an impact on the poorest population,” Acosta said.

VAT increase in Ecuador: when will it come into effect?

At the same time, the government must work on prioritizing public spending, because the state is “burdened with useless institutions that do not add value to citizens.” “We must eliminate what does not add value and prioritize resources on what matters: safety, health, education!” Acosta recommended.

“Create trust so that resources are used exclusively for security”

On the other hand, he warned that the revenues from the increase in VAT will go to the Treasury’s Single Account, “but the characteristic of that account is that everything disappears, everything goes to finance this excessive and uncontrolled public spending, and it cannot be guaranteed that it will go after the what you really want.” For this reason, Acosta indicated that if we want to create trust in the citizen contribution mechanism, trust must be created, which ensures that the destination of these funds, including those generated by fuel targeting, is to finance security.

Juan Carlos Díaz Granados, executive director of the Guayaquil Chamber of Commerce, agreed that unproductive public spending must be reviewed. As an example, he cited the case of public procurement, through which, according to him, billions of dollars are lost. “Sometimes they buy inputs at up to five times the normal price,” he added.

Daniel Noboa hopes to raise $1,306 million a year with an increase in VAT to 15% that will go to social security and protection

“Sacrifices do not always have to come from taxpayers,” he added and explained that increasing taxes makes it more difficult to attract investments, reduces consumer purchasing power and international competitiveness.

“Abolition of subsidies is more expensive”

However, there are also actors in the production sectors who do not agree with touching fuel subsidies and see an increase in VAT as a better option. José Antonio Camposano, president of the Board of Directors of the Corporation of Exporters Guilds of Ecuador (Cordex) and the National Chamber of Aquaculture (CNA), pointed out that the abolition of fuel subsidies is more expensive for people than the increase in VAT. . “Given the need to cover the costs of fighting crime, the options are limited. I hope we understand that,” the host said on his X account.

Camposano explained that for an average income of $400 a month, an increase in VAT to 15% affects $17 a month, or 4.2 percent of their income, while the abolition of the subsidy would affect $50 a month. , 12.5% ​​on that income.

The Chamber of Industry of Guayaquil also agrees with the VAT increase, but also hopes that the state will reduce public spending. In a press release, the union explained that VAT is a tax that is easy to collect and has little evasion, which ensures its quick collection.

“We believe that this measure will provide important resources to help fight terrorism,” said the union, indicating that the price of achieving peace is very high and takes a long time. “In order to achieve this, everyone’s effort is needed,” said the Chamber.

In the meantime, the deadline for urgent economic processing in the National Assembly is 30 calendar days, that is, they will be able to decide until February 11 on the project presented by President Nobo.