The Brazilian Supreme Federal Court (STF) will soon decide a tax controversy that could affect production costs across capital‑intensive industries such as steel, paper, cement and petrochemicals. At issue is whether companies can claim credits for the ICMS (state value‑added tax) paid on intermediate goods—inputs that are consumed or worn out during manufacturing but do not become part of the final product.
In 2023, the First Section of the Superior Tribunal of Justice (STJ) ruled that, under Articles 20, 21 and 33 of the Kandir Law (Complementary Law 87/96), the ICMS credit is due whenever the essentiality of the input to the final activity is demonstrated, even if the input is not physically incorporated into the product. The STJ reasoned that the Kandir Law replaced the old ICM 66/88 agreement, which limited credits to physically incorporated inputs, with a broader financial‑credit model that allows offsetting tax on purchases linked to productive activity.
The STF’s upcoming judgment will examine whether the STJ’s interpretation aligns with the constitutional principle of non‑cumulativity of the ICMS, enshrined in Article 155, § 2º, I of the Federal Constitution. That principle aims to prevent tax accumulation along the production chain. Limiting credits only to inputs that become part of the final product would recreate cumulativity for items that, by their nature, can never be part of the product yet are indispensable to production.
The Folha de S.Paulo article notes that the STJ’s decision rests on precedents formed under the revoked ICM 66/88 agreement, while the Kandir Law and the Constitution do not require physical incorporation for credit eligibility. The court will also consider whether upholding a stricter credit rule would amount to judicial overruling of a legislative choice made by Congress nearly three decades ago.
If the STF affirms the STJ’s position, manufacturers could recover ICMS paid on essential inputs, reducing effective tax burdens and potentially improving competitiveness. Conversely, a ruling against the credit would leave the tax embedded in production costs, contradicting the constitutional goal of non‑cumulativity.
Based on single-source reporting from Folha de S.Paulo.