The debate over what is selective tax in tax reform has gained momentum in recent years, especially among business owners and managers concerned about the increasing tax burden on specific products.
In practice, we are talking about a tax designed to be levied on goods and services considered harmful to health or the environment.
The Selective Tax (IS) is a tax created by the tax reform to be levied on products and activities considered harmful to health or the environment, such as cigarettes, alcoholic beverages, sugary drinks, vehicles, and mineral resources, with differentiated tax rates and a focus on discouraging consumption and adjusting the tax burden.
To understand in detail how the IS will be levied, which sectors will be most affected, and what your company can do to prepare for these changes, keep reading and check out the full analysis prepared by the experts at CLM Controller.
What is a selective tax?
The selective tax is a tax provided for in the tax reform that is levied on products and services considered harmful to health and the environment, such as alcoholic beverages, cigarettes, and certain mining operations.
It was formally established by the Constitutional Amendment No. 132, enacted in 2023, which overhauled the Brazilian tax system by creating new consumption taxes and reorganizing the division of powers among the federal government, states, and municipalities.
In practice, the excise tax serves as a tool to discourage consumption of these products, as well as an additional source of revenue.
Therefore, companies operating in these sectors need to reassess their pricing, contracts, and business strategies.
What is the principle of selectivity?
The principle of selectivity is a concept used in tax law, according to which taxation should vary based on the essential nature of goods and services.
Simply put, the more essential a good is to the population, the lower the tax burden on it should be; the less essential or the more harmful it is, the higher the tax rate may be.
In the case of the IS, this principle is applied precisely to justify higher tax rates on items considered superfluous or harmful. Thus, the tax system functions not only as a revenue-raising mechanism but also as an instrument of public policy.
How will the new selective tax work?
The new selective tax, within the context of What Is a Selective Tax in Tax Reform?, will function as a specific federal tax levied on goods and services defined in a complementary law.
It will be levied at specific stages of the supply chain—usually during production or importation—to simplify oversight and reduce disputes between companies and the government.
Tax rates will vary depending on the type of product, taking into account the impact on health and the environment. In addition, the excise tax will be levied in a manner cumulative, that is, without the right to credit, which makes detailed cost planning all the more important.
Companies in the alcoholic beverages, tobacco, mining, and other industries included on the list will need to review their contracts, profit margins, and price-pass-through strategies to avoid losing their competitive edge.
Is the ICMS a selective tax?
O ICMS It is not, in essence, a selective tax, but it may apply the principle of selectivity in some cases. This means that states can set different tax rates depending on the type of product, taxing essential items at lower rates and products considered superfluous or harmful at higher rates.
However, the ICMS is a broad tax on the circulation of goods and services, while the selective tax, created as part of the tax reform, specifically targets certain sectors and products, functioning as an additional tax with a clearer extrafiscal purpose.
Which products will be subject to the selective tax under the tax reform?
The products that will be subject to the selective tax under the tax reform are primarily vehicles, boats, and aircraft; cigarettes and other tobacco products; alcoholic beverages; sugary drinks; mineral resources; ores; and activities such as lotteries, betting, and fantasy sports.
The central logic is to tax items that have a significant impact on health or the environment, using tax rates calibrated according to criteria of sustainability, harmfulness, and public policy. Below, we detail how the tax will be structured for each group.
Vehicles
Vehicles will be subject to the IS tax at rates determined based on criteria such as energy efficiency, recyclability of materials, and levels of pollutant emissions. In other words, more polluting vehicles tend to be taxed at higher rates, while more efficient models may be subject to lower rates.
There will be a zero tax rate for vehicles intended for taxi drivers, people with disabilities, and sustainable light-duty vehicles. In practice, this creates an economic incentive for cleaner and more accessible fleets.
Vessels and aircraft
Vessels and aircraft will also be subject to the selective tax, with rates set based on environmental sustainability criteria. The idea is to take into account factors such as fuel consumption, emissions, and, potentially, the type of operation.
Although the specifics still depend on specific regulations, the proposal points toward a tax system that seeks to align the air and maritime transportation sectors with climate and environmental goals, thereby increasing the importance of tax planning and investments in more efficient technologies.
Cigarettes and tobacco products
Cigarettes and tobacco products will be subject to staggered tax rates between 2029 and 2033, as part of a transition process that will gradually adjust the tax burden.
During this period, the gradual reduction of the ICMS will be incorporated into the selective tax structure, reorganizing the way these products are taxed in Brazil.
This is one of the examples we most often cite when we explain What Is a Selective Tax in Tax Reform?, since the combination of a high tax rate and progressive tax brackets reinforces the extrafiscal nature of the tax, which is intended to discourage consumption.
Alcoholic drinks
Alcoholic beverages will be taxed at rates determined based on each product’s alcohol content. As a result, beverages with higher alcohol content tend to face a higher tax burden, while those with lower alcohol content may be subject to lower taxes.
This adjustment allows the excise tax to be aligned with public health policy, while requiring companies to conduct a detailed review of their product portfolios, margins, and pricing strategies, especially in the premium and high-alcohol-content segments.
Sugary drinks
Sugary beverages will also be subject to the excise tax, with tax rates to be set by specific regulations.
The trend is for criteria such as sugar content, beverage type, and nutritional profile to be taken into account when setting tax rates. This means that products with higher sugar concentrations may be subject to higher taxes. For the industry, understanding what constitutes a selective tax in the tax reform is essential for evaluating product reformulations, portfolio mixes, and marketing strategies aligned with a scenario of greater fiscal restraint.
Mineral resources (except for export)
Mineral resources intended for the domestic market will be subject to a selective tax at a maximum rate of 2.5%. In other words, the law may set different rates depending on the type of mineral resource, but always within this cap.
Exports of mineral products will be exempt from the tax, thereby preserving international competitiveness.
For companies in the sector, this upper limit must be factored into economic feasibility analyses, especially for projects with a greater environmental impact or tighter profit margins.
Lotteries, betting, and fantasy sports games
Lotteries, betting, and fantasy sports games will also be subject to income tax, with tax rates set forth in specific legislation.
The idea is to tax this type of entertainment activity, both to generate revenue and to align with responsible gaming policies.
The exact method of collection, as well as the basis for calculation, will still depend on the regulations, but companies and platforms operating in this sector will need to prepare for a more demanding regulatory environment and additional tax costs.
Minerals (except for export)
Minerals intended for the domestic market will be subject to a selective tax with a maximum rate of 0.25%. As with mineral resources in general, exports are exempt from this tax, thereby preserving the sector’s international competitiveness.
Even with a relatively low cap, this tax adds to other costs and can affect large-scale projects.
Therefore, mining companies will need to factor the selective tax into their analyses of cash flow, capital structure, and environmental sustainability, especially in long-term operations.
What is the excise tax rate under the tax reform?
The selective tax rates under the tax reform will not be the same for all products. They vary depending on the type of good and its impact on health or the environment. In general, the proposed structure is as follows:
- Cigarettes: may be subject to taxation of up to 250%, further reinforcing the effect of discouraging consumption.
- Alcoholic beverages: must have tax rates between 46% and 62%, with progressive taxation based on alcohol content or product category.
- Sugary drinks (such as soft drinks): the estimate is for a shipment of around 32%, in line with health policies.
- Oil, natural gas, and iron ore: will have a maximum tax rate of 0.25%, focused primarily on internal operations.
- Motor vehicles and other items considered harmful: will have tax rates set according to criteria related to sustainability, emissions, and specific characteristics, as further detailed in the regulations.
When does the selective tax take effect?
The Selective Tax (IS) is scheduled to take effect on January 1, 2027. This date is part of the implementation schedule for the tax reform, which will be introduced in phases over the next few years.
Until then, there will still be supplementary regulations setting forth details regarding collection, tax rates, and the products covered. Therefore, it is essential that companies follow each step of this process to avoid surprises during the transition.
How does the selective tax affect the Manaus Free Trade Zone?
The Selective Tax has a direct impact on the Manaus Free Trade Zone (ZFM) because it “shares functions” with the IPI and alters the region’s tax protection framework.
Under the approved framework, the IPI remains the ZFM’s primary instrument for competitive protection, while the IS is now levied on goods considered harmful to health or the environment, and may not be levied cumulatively on the same products that are already subject to the IPI.
In practice, the design works like this:
- The IPI tax will be reduced to zero for most products in the rest of the country, but will continue to apply to items produced outside the ZFM that have similar products manufactured in the region, creating a tax barrier that protects the local industrial hub.
- The Constitution prohibits the simultaneous imposition of the IPI and the Selective Tax on the same good, so the Selective Tax cannot “compete” with the IPI in transactions related to the ZFM. .
- Key sectors in the Free Trade Zone, such as beverages and concentrates used in soft drinks, are coming under scrutiny for the Selective Tax because they are associated with potentially harmful products, which requires companies to pay close attention to future regulations and to strike a balance between regional incentives and measures to discourage consumption.
Why should companies be aware of the selective tax?
Companies should be aware of What Is a Selective Tax in Tax Reform? because it directly affects pricing, margins, and competitiveness, especially in sectors that sell goods considered harmful to health or the environment.
Understanding What Is a Selective Tax in Tax Reform? It is not just a conceptual issue, but a practical necessity for those working in the alcoholic beverages, tobacco, sugary drinks, mining, and related industries.
Since this is a cumulative tax, the impact on the final cost could be significant, requiring a review of contracts, renegotiation with distributors, and adjustments to the business strategy.
The selective tax comes on top of the changes introduced by the new consumption tax model, which makes tax planning even more complex.
Companies that anticipate scenarios, simulate different tax rates, and redesign their business models tend to navigate the transition with less risk and greater predictability.
How can CLM help your company with the new tax reform?
In CLM Controller, we have been following the discussions on What Is a Selective Tax in Tax Reform? and their real-world impacts on businesses.
Our team of experts in Actual Profit and Presumed Profit works strategically with companies across various industries, including businesses in import and export, which tend to be particularly sensitive to changes in consumption taxes.
With experience in international operations and complex corporate structures, we analyze the entire value chain to identify areas of concern, risks of increased workload, and opportunities for optimization.
We are prepared to interpret the new legislation, simulate tax rate scenarios, and assist with adjustments to pricing, contracts, and tax structures.
If your company wants to navigate the reform safely and with a long-term vision, talk to an expert of CLM Controller and request a strategic diagnosis for your business.
FAQ
Does the selective tax apply to fuels?
No. According to the approved reform plan, the selective tax will not be levied on fuels. This sector will follow a different taxation framework under the new system, with specific rules for consumption taxes, but without the selective tax intended for products that are harmful to health or the environment.
Have firearms and ammunition been excluded from the tax list?
Yes. Firearms and ammunition were at one point discussed as possible items subject to the selective tax, but they were excluded from the final approved text. The political rationale involved pressure from various sectors and debates on public safety. Consequently, these items are not included in the list of products subject to the new selective tax under the tax reform.
Will small and medium-sized businesses be affected by the selective tax?
Even though many small and medium-sized businesses do not directly manufacture products subject to excise taxes, they may be indirectly affected. Distributors, retailers, bars, restaurants, and merchants selling beverages or cigarettes, for example, will feel the impact on replacement costs and consumer demand sensitivity. For this reason, it is important to stay informed about this issue, even outside the industry.
