The Brazilian government postponed until next year increases in taxes on the sale of cars and trucks in a bid to stimulate demand for manufactured goods and spur economic growth, the Finance Ministry said on Saturday.
The IPI tax on manufactured products was reduced last year for vehicles as part of a barrage of tax breaks and other stimulus measures by President Dilma Rousseff's government to restore life to a flagging economy in Latin America's largest nation.
The tax on vehicles was reintroduced this year and the government planned to restore the levy to previous levels, but weak vehicle sales led it to put off the plan.
Finance Minister Guido Mantega said the government wanted to "avoid the risk of a drop in sales throughout the year."
"The car industry is very important for Brazil's economy, it accounts for 25 percent of industrial production," Mantega said on Globo TV. "So, to keep industrial output growing, it is important that the auto industry keeps growing."
Brazil's economy grew just 0.9 percent last year, a miserable performance following last decade's boom. Along with currency losses, it caused Brazil to fall back behind Britain to seventh place among the world's largest economies.
The economy perked up and grew somewhat faster in the last three months of 2012 when private investment rebounded, but manufacturing remained stuck in its years-long slump, falling 0.5 percent in the fourth quarter.
A stagnant economy that is unaffected by government stimulus measures, combined with rising inflationary pressures, has begun to cloud the 2014 re-election prospects for Rousseff, though she is still highly popular thanks to low unemplyment.
The Brazilian central bank expects the economy to expand by 3.1 percent this year, while Mantega still believes GDP growth could top 4 percent.
The ministry said the postponement of the IPI tax increases for vehicles through December will cost the government 2.2 billion reais ($1.09 billion) in lost tax revenue.
"With this decision, the government is stimulating not just the automobile industry, one of the main drivers of the economy, but also the whole chain of industries such as car parts, upholstery and accessories," a ministry statement said.
The IPI tax on small cars with motors of up to 1,000 cc, for example, was due to rise to 3.5 percent on Monday but will remain at 2 percent through the end of the year, the ministry said. It had been 7 percent before it was cut to zero last year.
The tax on larger cars with flex motors of up to 2,000 cc will remain at 7 percent instead of going up to 9 percent as planned, and gasoline cars with continue to be taxed at 8 percent instead of rising to 10 percent.
Cars with gasoline motors larger than 2,000 cc will continue to have an IPI tax of 25 percent levied on them. Sales of trucks will continue to be exempt from any IPI tax, the ministry said.