Can ICMS be charged on electricity bills? Understand the possibilities

Have you ever wondered why your electricity bill includes an ICMS amount? ICMS (Tax on the Circulation of Goods and Services) is a state tax levied on various economic activities, including electricity. However, doubts have arisen about the legality and form in which this tax is levied, raising questions about the possible ways in which it can be applied to consumers' electricity bills. 

What is ICMS?

ICMS (Tax on the Circulation of Goods and Services) is a state tax in Brazil. It is levied on the movement of goods, the provision of interstate and intercity transportation services, communication and electricity.

Its institution is provided for in the 1988 Federal Constitution, and it is regulated by complementary laws and by the state legislation of each federative unit. The ICMS is one of the main taxes collected by Brazilian states, representing a significant source of revenue to finance essential public services such as health, education, security and infrastructure.

The basis for calculating ICMS is the value of the transaction or service rendered, i.e. the price of the goods or service, including taxes, fees, freight and insurance charged in the transaction. The ICMS rate varies according to the goods or services in question and can also vary between Brazilian states.

ICMS is collected by the states and the Federal District, which have the autonomy to set their own rates and specific legislation. This means that each state can establish its own rules for collecting and monitoring this tax, as long as it respects the general principles established in the Federal Constitution and complementary laws.

In addition to its importance as a source of revenue for the states, the ICMS also plays an important role in the country's economic policy. It can be used as an instrument to regulate the economy, by granting tax benefits, incentives and special regimes, with the aim of promoting regional development, stimulating certain productive sectors and attracting investment to certain regions.

Charging ICMS on electricity bills

Charging ICMS (Tax on the Circulation of Goods and Services) on electricity bills is common practice in several Brazilian states. This tax is levied on the electricity consumed by users and represents a significant part of the total value of the electricity bill.

The way ICMS is charged on electricity bills can vary according to the state legislation of each federal unit. In general, the tax is calculated on the total amount of the electricity bill, including not only the cost of the energy actually consumed, but also other charges and fees levied by the energy distributors, such as the distribution tariff and the public lighting fee.

This inclusion of charges and fees in the ICMS calculation base has been questioned by consumers and some sectors of society. Some argue that ICMS is being levied on amounts that do not correspond to the actual movement of goods or the provision of services, which could constitute an undue charge.

In addition, the variation in ICMS rates between Brazilian states can result in a differentiated tax burden for electricity consumers, depending on where they live. This means that consumers in a given state may pay more or less ICMS on their electricity bill compared to consumers in other states, even if they consume the same amount of energy.

Despite the questions, the state governments defend the ICMS tax on electricity, arguing that it is legal and constitutional. They claim that the funds collected are essential to finance public policies and services provided to the population, such as investments in electricity infrastructure, social programs and measures to combat the energy crisis.

Possible questions and debates

The possible questions and debates surrounding the collection of ICMS on electricity bills cover a range of aspects, from technical and legal issues to concerns about the economic and social impacts of this practice. Here are some of the main points generating controversy and fueling the debate:

• ICMS calculation basis: One of the main questions is in relation to the inclusion of charges and fees in the ICMS calculation basis. Some consumers and organizations argue that the tax is being levied on amounts that do not correspond to the actual movement of goods or the provision of services, which could constitute an undue charge.
• Variation in rates between states: The variation in ICMS rates between Brazilian states is another source of debate. This is because it can result in a different tax burden for electricity consumers, depending on where they live. Consumers in a given state may pay more or less ICMS on their electricity bill compared to consumers in other states, even if they consume the same amount of energy.
• Transparency in billing: Some consumers question the lack of transparency in charging ICMS on their electricity bills. Often, the amounts relating to the tax are not clearly broken down on electricity bills, making it difficult for consumers to understand how ICMS is being calculated and what the exact amounts they are paying are.
• Impact on the cost of energy: The ICMS tax levied on electricity bills can represent a significant portion of the total cost of electricity for consumers. This can be especially relevant for low-income consumers or companies that consume large amounts of energy, as the tax can directly influence their operating costs.
• Legislation and jurisprudence: There are different interpretations of legislation and jurisprudence relating to the collection of ICMS on electricity bills. While some understand that the practice is legal and constitutional, others question its compliance with current legislation and seek legal protection to challenge the charge or obtain clarification on its application.

State governments' arguments

State governments put forward a series of arguments to justify charging ICMS on electricity bills and defend its legality and importance. Below are some of the main arguments used by these governments:

Source of income

The ICMS tax levied on electricity bills represents a significant source of revenue for state governments in Brazil. This tax is one of the main sources of funding for government activities at state level, contributing directly to the maintenance and expansion of essential public services offered to the population.

• Financing public services: The funds collected through the ICMS on electricity are earmarked to finance a variety of public services provided by the states, such as health, education, public safety, infrastructure, transportation, social assistance, among others. These services are fundamental to guaranteeing the well-being of the population and the socio-economic development of the regions.
• Investments in infrastructure: A portion of the funds from the ICMS is earmarked for investments in infrastructure, including the construction and maintenance of roads, bridges, water supply and basic sanitation networks, public transport systems, as well as the modernization and expansion of the electricity system. These investments are essential for promoting the economic and social development of the states and improving the quality of life of the population.
• Fiscal balance: ICMS collection contributes to the fiscal balance of the states, helping to cover the costs of running the public machine and to honor the financial commitments made by the state government. This is especially important in times of economic crisis or a drop in the collection of other taxes, when ICMS resources can be used to maintain the state's financial stability.
• Regional development: ICMS resources are also used to promote regional development and reduce socio-economic inequalities between the different municipalities and regions of the state. This can include the implementation of tax incentive policies to attract investment, the creation of economic and social development programs and the provision of quality public services in less developed areas.

Fiscal balance

Fiscal balance is a fundamental condition for the financial health of a government, be it federal, state or municipal. It refers to the government's ability to balance its income and expenditure over time, ensuring the sustainability of public finances and avoiding excessive budget deficits.

• Avoiding budget deficits: One of the main objectives of fiscal balance is to avoid prolonged budget deficits, in which government spending exceeds its revenues. When this happens, the government has to resort to borrowing or raising taxes to cover the deficit, which can lead to an increase in public debt and inflationary pressures.
• Maintaining credibility: Maintaining fiscal balance is essential to preserving the government's credibility with investors and the financial markets. Governments that have responsible fiscal management and are able to balance their accounts tend to pay lower interest rates when borrowing, as they are considered less risky.
• Ensuring economic stability: Fiscal balance contributes to economic stability by preventing major fluctuations in government spending and the tax burden. This provides a more predictable environment for economic agents, encouraging investment, economic growth and job creation.
• Preserving investment capacity: Maintaining fiscal balance allows the government to preserve its investment capacity in priority areas such as infrastructure, education, health and security. Well-targeted public investments can generate significant returns for the economy, boosting long-term growth and improving the population's well-being.
• Reducing vulnerability to economic shocks: Governments that keep their finances balanced are better prepared to deal with economic shocks, such as recessions or financial crises. They have more leeway to implement counter-cyclical policies, such as fiscal stimulus or expansionary monetary policies, to stimulate economic activity and mitigate the adverse effects of these shocks.

Legal and constitutional charges

The collection of ICMS (Tax on the Circulation of Goods and Services) on electricity bills is considered legal and constitutional on a number of legal grounds. Below are some reasons that support this claim:

• Constitutional provision: Article 155, II of the 1988 Federal Constitution establishes that it is the responsibility of the states and the Federal District to institute the ICMS, levied on the movement of goods and the provision of interstate and intercity transportation and communication services. In this way, the collection of ICMS on electricity complies with the country's highest legislation.
• State competence: ICMS is a state tax, i.e. its institution and collection are the responsibility of the states and the Federal District. This means that each state has the autonomy to legislate on this tax and determine its rates, calculation basis and collection rules.
• Complementary legislation: In addition to the Federal Constitution, the collection of ICMS on electricity is also regulated by complementary laws, such as Complementary Law 87/1996, known as the Kandir Law, and by specific state laws that establish the rules and procedures for collecting this tax.

Tax policy

The states' tax policy includes charging ICMS on a wide range of products and services, including electricity. This taxation is seen as a way of distributing the costs of providing public services more equitably between the different sectors of society.

Investments in infrastructure

The funds collected from the ICMS tax on electricity can be used by the states to invest in electricity infrastructure, modernize the distribution system, expand generation capacity and other measures aimed at guaranteeing a safe and sustainable energy supply.

Fighting the energy crisis

In times of energy crisis, as has happened on several occasions in Brazil, ICMS funds can be used for emergency measures, such as incentives to reduce consumption, investments in alternative energy sources and public awareness campaigns.

A complex issue

Charging ICMS on electricity bills is a complex issue that involves different legal, tax and social aspects. Although it is a common practice in several Brazilian states, it generates debate and questions from consumers and society in general. 

It is important that consumers are aware of their rights and seek information on how ICMS is levied in their region. If you have any doubts or questions, it is advisable to contact consumer protection agencies or consult a lawyer specializing in tax law.

See also: 10 profitable businesses in Brazil

April 3rd, 2024