By Luana Maria Benedito

SAO PAULO (Reuters) – Brazilian Finance Minister Fernando Haddad said on Friday that resistance from some sectors to tighter rules for the use of tax credits will dissipate and Congress will make the best decision on whether the new rules are permanent.

This week, the ministry unveiled tighter rules for the use of tax credits by companies, triggering a strong backlash from the most affected industries, including the powerful agribusiness sector.

“The repercussion has a lot of heat of the moment. This will dissipate as people understand the objective of reducing tax expenditure,” he told journalists.

The new rules aim to raise as much as 29.2 billion reais ($5.52 billion) to offset a revenue loss of 26.3 billion reais from tax benefits passed by Congress for the payrolls of some economic sectors and small cities.

The measure was included in an executive order sent to Congress earlier this week. It takes effect immediately but needs legislative approval within four months to remain valid.

Additionally, the so-called presumed PIS-Cofins tax credit will still be usable but no longer refundable in cash, cutting the government’s tax expenditures.

Brazilian lobbies from soybean companies to the biofuel sector have come together to strongly criticize the new rules, increasing the odds that Congress, heavily influenced by farming interests, will reject the measure.

“What did these sectors expect? For us to remain inert? We could not be inert, and this seemed to be the fairest of measures, because sectors that do not need subsidies were being benefited,” Haddad said in response to industry backlash.

“Congress will make the best decision… We have time to explore possibilities and to open up the numbers to lawmakers,” he added.

CONTINGENCY MEASURES

Haddad said on Friday that President Luiz Inacio Lula da Silva’s government might have to impose budget blocks this year to meet its hard-to-reach fiscal target.

“We have a fiscal framework we have to respect. If we exceed the limit established in the fiscal framework, you must have contingency measures,” he told journalists.

In May, Brazil’s government raised its primary deficit forecast for this year to 14.5 billion reais ($2.81 billion), or 0.1% of GDP. The goal for 2024 is to eliminate the primary deficit, with a tolerance margin of 0.25 percentage point of GDP in either direction.

Haddad also said on Friday the government expects to send to Congress a decree to regulate the country’s inflation target this month. He reinforced that the current inflation target of 3% will not change, as previously reported by Reuters.

The country’s National Monetary Council (CMN) currently sets an annual inflation target that must be met each calendar year. Haddad, however, has been calling for a shift to a continuous target horizon, which, in practice, would imply a 24-month period to assess compliance.

($1 = 5.2912 reais)

(Reporting by Luana Maria Benedito in Sao Paulo; Editing by Jonathan Oatis and Matthew Lewis)

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