The Industry and Commerce Tax (Impuesto de Industria y Comercio – ICA) is Bogotá’s main source of revenue, representing nearly half of total tax collection in recent years. However, there is still scope to enhance its progressivity, efficiency, and transparency. This chapter analyses the current ICA framework and proposes tax policy options to strengthen revenue mobilisation while simplifying the system, making it more progressive, and supporting business formalisation. It models alternative rate structures based on income and profits, showing that more progressive schemes could enhance equity and raise revenues while easing the burden on smaller firms. The chapter also maps existing incentives and special tax treatments and explores the use of simplified tax returns to facilitate compliance. Finally, it underscores the importance of improving methodologies for measuring and reducing ICA tax evasion to promote a fairer and more efficient local tax system.
Reconnecting Bogotá
Abstract
The Industry and Commerce Tax (Impuesto de Industria y Comercio – ICA) in Bogotá is a subnational levy that serves as the primary source of tax revenues for the city. On average, it accounted for more than 40% of total tax revenues between 2018 and 2024. Since 2021, its importance has grown, representing nearly half of all tax revenues, hovering around 47% of the city’s total tax intake.
The levy is currently regulated under various norms, with District Decree 352 of 2002 being the main one, and it applies to a broad range of economic activities conducted within Bogotá’s jurisdiction. The taxable base is determined by the gross income earned, with specific provisions allowing for exclusions and adjustments. The ICA’s periodicity follows a bimonthly or annual declaration cycle, depending on the taxpayer's revenue level. The tax rates vary depending on the type of activity, and modifications have been introduced over time to ensure a more progressive structure, particularly for newly formalised businesses. The ICA currently applies differentiated rates across 14 sectors, creating a complex system that can be challenging for both businesses and tax authorities to navigate. This complexity is further heightened by the extensive use of tax incentives and special tax treatments, which, while aiming to promote certain activities, can add to the administrative burden and reduce transparency.
This section makes the case for three main points. First, it models alternative ICA tax rate scenarios to explore options for a more simplified and progressive structure. Second, it maps existing tax incentives and special tax treatments, highlighting the need for a more consolidated tax framework that reduces governance complexity and strengthens coherence with broader national policy objectives. Third, it analyses new methodologies for ICA invoicing so that it is generated automatically, like the property tax, rather than being self-declared.
A simplified ICA could bring multiple benefits. Fewer rules and administrative procedures would allow taxpayers to better understand and fulfil their obligations without unnecessary complications, reducing errors and streamlining the payment process. A clearer tax structure would also discourage tax evasion, as businesses would have fewer incentives to underreport income or exploit loopholes, leading to higher revenue collection and improved fiscal responsibility. A simpler ICA system would also lower administrative costs for both the government and businesses. Reducing the burden of tax calculations and filings means less time and money spent on compliance, allowing companies to focus on growth and productivity. Additionally, simplification can drive economic formalisation, making compliance more accessible and affordable for small businesses. When taxes are easier to understand and pay, more businesses transition from the informal sector, strengthening the tax base and contributing to sustainable development.
Rethinking the current ICA rate structure could make Bogotá’s tax system more progressive and formal, while helping to reduce economic distortions. Given the wide dispersion in income and profit levels across firms, as well as the diversity in business size and operational capacity there is space to increase the progressivity of the ICA. In a context where business formalisation remains a central challenge, a progressive structure would ease the tax burden on micro and small enterprises, encouraging their transition into the formal economy. At the same time, it would ensure a greater contribution from firms with higher economic capacity, potentially increasing revenue without harming productive activity. This combination of goals – revenue generation, formalisation, business growth, and inequality reduction – strengthens the case for a reform aimed at greater progressivity in the ICA.
To simplify and make the ICA more progressive, the analysis suggests two possible options. One approach is to reduce the number of differentiated rates, streamlining the tax structure to make it easier to administer and comply with. Another option is to transition to a progressive tax system, where the differentiated tax rates are defined based on the size of the firm, measured by its income or profit, rather than the sector in which it operates. Any change to the ICA should ensure that it does not overlap with taxes levied at the national level, to ensure a coherent and non-overlapping tax system.
Simplifying the ICA by streamlining the tax structure
Bogotá stands out as one of the cities with the highest number of differentiated ICA tariffs, with a total of 14 rates applied across economic activities (Figure 4.1). While there is no universally optimal number of differentiated rates, the level of differentiation should reflect clear economic policy objectives. In general, a lower number of rates tends to enhance administrative simplicity, reduce compliance costs, and improve overall transparency in the tax system.
Consider the possible misalignment between tax rates and payment capacity
Any reduction or regrouping of current tax rates could take into account the payment capacity of each sector, as well as broader economic and social policy objectives. Table 4.1 illustrates significant misalignments between the ranking of income levels and the ranking of tax rates across sectors. For instance, some service subsectors face relatively high tax rates despite low-income rankings – such as Commercial 203,1 with a gap of eleven positions. Conversely, others like Services 301 face lower tax rates despite higher income levels. In contrast, financial and certain industrial subsectors show closer alignment between income and taxation. These disparities point to potential inefficiencies and equity concerns in the existing tax structure.
Determining tax rates without directly linking them to income levels is a common practice, as rates often reflect broader social or economic objectives. However, such adjustments can be considered preferential rates or special treatments, and their impact must be carefully assessed to ensure they achieve their intended goals without undermining efficiency or revenue collection. These measures should also be co-ordinated with existing preferential treatments and tax exemptions and aligned with Bogotá’s development priorities as well as national development goals (see section below on ICA incentives and special tax treatments).
Ranking the tax sectors by their profits and not by their income could further decrease distortions
A tax where the base is determined by gross income, such as the ICA, rather than profit, can lead to significant economic distortions. As it does not take production costs into account, it places a disproportionate burden on industries with low profit margins or high intermediate input costs. This structure can discourage investment, innovation, and productivity, as businesses may face high tax liabilities even when their net earnings are minimal. Moreover, it creates an uneven playing field, favouring sectors with lower operational expenses over those with substantial input requirements.
While changing the taxable base may not always be feasible, tax policy can still be adjusted to better account for business profitability. Implementing a tiered tax rate system defined by profit margins – rather than gross income or existing rates – could help reduce economic distortions and improve equity. However, in the case of Colombia, such a reform would require a legal modification, as it would involve changing one of the essential elements of the tax obligation: the taxable base. Therefore, while the proposal may remain valid from a policy perspective, it is important to acknowledge it as a long-term proposal due to the legal constraint in the Colombian context.
Using income levels as a proxy for tax capacity can be misleading, as it overlooks the role of profitability in determining a business’s real ability to contribute to tax revenue. Table 4.2 illustrates significant misalignments between income and profit levels across sectors. For example, the Industrial sector (Subsector 103) ranks 6th by income but 1st by profit, reflecting strong cost efficiency. Conversely, the Commercial sector (Subsector 204) ranks 5th by income but drops to 9th in profit, suggesting that high revenues do not necessarily translate into high financial capacity. These discrepancies highlight the limitations of income-based assessments and reinforce the need for tax policies that better account for actual profitability to ensure fairness and efficiency.
Simplifying the ICA by a progressive tax structure
While a sector-based tax rate adjustment may simplify the system, it overlooks the substantial heterogeneity both across and within sectors. Figure 4.2 illustrates this clearly, with wide differences in average income levels across subsectors and stark contrasts in income dispersion. Some sectors exhibit high internal variability, indicating a mix of firms with vastly different scales of operation and financial capacity. Others show more uniform income distribution, suggesting a more homogenous business structure. These disparities highlight the limitations of applying uniform tax rates within broad sectoral categories and underscore the need for a more nuanced approach that reflects intra-sectoral differences in revenue generation and economic scale.
Note: UVT = tax value units.
Source: Authors’ own calculations based (Secretaría de Hacienda de Bogotá, 2024[2]).
Looking deeper into the data, significant disparities emerge within sectors, particularly in how income is distributed among firms. The highest deciles capture a disproportionately large share of total earnings, with striking jumps between the top segments. In some sectors, the income of the 10th decile is several times higher than that of the 9th, indicating sharp concentration at the upper end of the distribution. For instance, in sector Industrial 101, the top decile earns roughly 30 times more than the 9th, and in sector Industrial 103, nearly 90 times more. The disparity is even more pronounced in the financial sector 401, where the 10th decile earns over 500 times more than the 9th. These patterns suggest that policies based solely on sectoral classifications risk overlooking substantial internal inequalities and highlight the need for more granular approaches that reflect the varied financial capacities within each sector.
The differences across sectors are not limited to income levels but also extend to the nature of the economic activities they encompass – each with distinct cost structures, payment capacities, and degrees of formality. For example, sector 201 includes both wholesale trade of food products and retail trade from mobile food stalls – subsectors that differ fundamentally in scale, operating models, and financial capacity. Similarly, the sector service 301 includes all type of transport services but also editing of journals and books. A more nuanced approach to taxation would better account for these internal differences, helping to ensure a fairer and more equitable distribution of the tax burden.
Given the significant heterogeneity in income and profitability across firms, a more progressive ICA tax model could enhance both equity and efficiency. Moving away from sector-based rates towards a framework in which tax rates are defined based on gross income or profits would better reflect firms’ capacity to contribute. This approach would ensure that larger, more profitable firms bear a greater share of the tax burden, while smaller firms benefit from reduced liabilities.
Estimating tax revenues under different scenarios
To assess the implications of alternative tax structures, this section models income outcomes under four distinct scenarios (Figure 4.3): (i) a scheme that differentiates sectors by income levels, (ii) a scheme that differentiates sectors by profit levels, (iii) a progressive scheme with increasing rates by income quintile and with the current suggested rates, and (iv) a progressive scheme with increasing rates by profit quintile with smoother rates for the higher earners. These scenarios reflect different approaches to tax design, from administrative simplicity to greater alignment with firms’ economic capacity. Modelling these alternatives allows for an evaluation of their potential effects on equity, efficiency, and revenue mobilisation across sectors.
Source: Authors’ own calculations based (Secretaría de Hacienda de Bogotá, 2024[2]).
Figure 4.4 compares the estimated revenue outcomes under the four modelled scenarios as a percentage of current income tax collection. The results show substantial variation in potential revenue impact across schemes. The income-based scenario, in which sectors are ordered according to their income levels, yields revenues around 6% higher than current levels. The scenario based on profit levels shows a possible increase of approximately 16%. In contrast, introducing a progressive scheme – based on the proposed rates and quintile distributions – significantly increases revenue, suggesting that a more differentiated rate structure, aligned with firms’ economic capacity, could enhance revenue mobilisation. However, by smoothing the tax rates across profit quintiles, especially for the highest (progressive scheme scenario 2), the additional tax burden can be moderated, preserving equity while limiting distortions. These findings highlight the importance of careful rate design in aligning tax policy with both equity and efficiency objectives.
Source: Authors’ own calculations based (Secretaría de Hacienda de Bogotá, 2024[2]).
A distributional analysis of the alternative schemes reveals significant differences in their impact across sectors (Table 4.3). While the income-based and profit-based schemes increase overall revenue, the effects across sectors are highly uneven. Certain industrial and service subsectors – such as 101, 102, and 301 – experience substantial increases under the differentiated schemes, reflecting their stronger capacity to contribute under an income- or profit-sensitive approach. In contrast, several commercial and service subsectors, including 203, 204, and 303, see notable reductions, particularly under the profit-based scheme, suggesting limited margins or structural vulnerabilities. These results underscore the need for tax designs that consider sectoral heterogeneity and avoid disproportionate impacts on specific segments of the economy. Any changes to the ICA should be implemented gradually to allow sectors sufficient time to adapt and to minimise potential disruptions.
Firms face different tax burdens depending on their size and the tax scheme implemented, with larger firms contributing more (Table 4.4). Under the progressive schemes, the lowest income deciles, deciles 1 and 2, are exempt from any tax payment, effectively safeguarding the smallest firms. In contrast, the current approaches based on tariffs, income, or profits impose a modest burden even on these lower deciles. As firm income increases across subsequent deciles, the progressive schemes register a substantially steeper escalation in contributions, with decile 10 reaching around 93.4% in Progressive scheme 1 and 91.4% in Progressive scheme 2. A progressive scheme supports vertical equity by ensuring that larger firms, which have a greater capacity to pay, shoulder a proportionately higher tax burden.
The ICA tax framework includes various tax incentives and special treatments aimed at promoting economic activity and supporting specific sectors (Figure 4.5). There are four tools that are applied in different ways to reduce the amount of ICA paid, or to grant full exemptions. The first involves granting tax discounts, often during times of crisis, as established through legal provisions. The second consists of special treatments granted through legal agreements to provide tax benefits to microenterprises and selected sectors. The third includes exemptions that fully relieve certain taxpayers from paying ICA. Finally, some activities are not subject to taxation under national laws or district agreements aimed at supporting specific sectors.
During times of crisis, legal provisions may offer temporary discounts for ICA taxpayers. For instance, Agreement 7-80 of 2020 introduced temporary tax incentives to support businesses affected by the COVID-19 crisis during 2021. One of its key provisions granted a tax discount of up to 25% to taxpayers whose taxable income declined in 2020 compared to 2019, with the percentage varying based on the severity of the reduction. This measure helped alleviate the tax burden on struggling businesses, supporting their recovery and continued operations in 2021. At the same time, the agreement introduced temporary tax surcharges for businesses that experienced revenue growth during the pandemic. Depending on the extent of their increase, these businesses faced a progressive ICA surcharge of up to 15% in 2021, ensuring a more balanced distribution of tax obligations during the recovery period.
Two types of special treatments are granted to benefit microenterprises and specific economic activities. The first type, established through legal provisions, applies progressive tax rates to microenterprises engaged in certain activities to promote formalisation. This special treatment, outlined in Article 15 of Agreement 780 of 2020, applies to individuals and legal entities that formalise their businesses between 2024 and 2030 and are registered in the Tax Information Registry, provided their income qualifies them as microenterprises. However, it does not apply to certain sectors, including financial services, film exhibition, wireless and satellite communications, transportation activities, road construction, public services, and other civil engineering works. The benefit remains in effect until 2031, after which the applicable tax rates in force at that time will apply.
The second type of preferential treatment involves offering special tax bases to fourteen sectors, often allowing for discounts on the final ICA payment. For example, when determining the ICA tax base for the financial sector, only operational income, such as commissions, interest, investment returns, and income from credit card transactions, is considered, rather than gross income. Similarly, distributors of petroleum derivatives use a special tax base calculated from gross commercialisation margins, defined as the difference between purchase and sale prices after deducting surcharges and other levies. For transportation companies operating with third-party vehicles, only their own earnings are subject to taxation, excluding the income passed on to vehicle owners. Special tax base regulations for different economic sectors are scattered across various laws enacted in Bogotá through district-level decrees. For the finance sector, special tax base regulations are established by laws, implemented in Bogotá through district-level decrees. Regulations governing petroleum derivative distribution and associated work cooperatives are set by national legislation, including the Tax Law. Similarly, rules for integrated cleaning and cafeteria services, as well as mobile telephony, are determined at the national level.
ICA tax exemptions apply to different taxpayers, some with general objectives and others for specific activities. As of April 2025, one exemption is in effect: a 100% exemption for taxpayers affected by terrorist acts or natural disasters. The other 100% exemption, for investments in bicycle parking facilities, was valid until 31 December 2024.
A variety of activities are also classified as non-taxable under national legal provisions. These include public education; primary agricultural, livestock, and poultry production; charitable work; cultural and sports activities; health services; exports; gambling and lotteries; horizontal property regimes; and energy projects in non-interconnected zones.
Source: Authors’ own elaboration based on district and national laws.
There are challenges in ICA regulation related to the absence of a consolidated tax framework
A key challenge in ICA regulation is the absence of a consolidated tax framework. Currently, there is no comprehensive legal statute that lists all existing exemptions, deductions, and special tax bases, or consolidates regulations on exemptions and special treatments, including the most recent rules and amendments. When the governance of investment tax incentives is complex, meaning incentives are scattered across multiple laws and regulations, it can reduce transparency and complicate monitoring and evaluation (Gascon et al., forthcoming[3]; OECD, forthcoming[4]). The more conditions an incentive or special tax treatment requires, the more complex its administration becomes, increasing the risk of tax evasion. It is essential to design conditions that are both enforceable and effective. Municipal tax incentives and special treatments should align with national priorities, particularly in sectors identified as strategic for economic growth. This alignment ensures coherence in fiscal policy and maximises the impact of incentives across different levels of government.
Measuring the objectives and impact of each incentive, including exemptions and special treatments is key. For instance, it is crucial to evaluate the impact of tariff simplification on specific economic activities, particularly when reductions apply to sectors associated with negative externalities. Broader activity categories may include sub-activities with negative impacts, potentially resulting in lower tax rates for them while raising rates for others with positive effects. Well-designed tax incentives can stimulate investment, enhance productivity, and support Sustainable Development Goals (SDGs). However, their benefits must be weighed against potential revenue losses and the risk of inefficient resource allocation (OECD, forthcoming[4]). Poorly designed incentives may have limited effectiveness and primarily benefit activities that would have occurred without them (OECD, forthcoming[4]).
It is also important to regularly assess the objectives and impact of special treatments that increase tax rates. Legal agreements have modernised ICA tax rates to reflect evolving economic realities, often resulting in rate increases. Agreement 780 of 2020 extended ICA taxation to digital delivery platforms, introducing new rates for services related to ordering, purchasing, distributing, and delivering products. Gradual rate increases have also been implemented for sectors such as financial services, pharmaceutical manufacturing, production of medicinal chemical substances and botanical products, professional consulting, construction-related services, and wired and wireless telecommunications. It is important to consider the profitability of these sectors to avoid imposing excessive tax burdens, especially in the financial sector, where many innovative startups are in early growth stages.
Re-evaluating incentives for highly profitable economic activities, particularly those already subject to low tax rates, could be considered. Special treatments and exemptions should be reviewed, considering profitability rankings, specifically focusing on sectors that generate the highest profits while already benefiting from low tax rates.
Establishing eligibility criteria that link benefits to actual investments may help improve the effectiveness of ICA incentives. Best practices highlight the importance of setting conditions based on measurable outcomes, using indicators that demonstrate tangible impacts on key economic variables such as employment and investment (Gascon et al., forthcoming[3]).
Clarifying the roles and responsibilities of different government levels and institutions may also contribute to more effective administration (Gascon et al., forthcoming[3]). While arrangements involving multiple authorities can complicate governance, they also offer benefits by bringing together diverse expertise and policy priorities. It is essential for ministries and agencies to co-ordinate their efforts, clearly define each agency's role, and align on overarching policy objectives (OECD, forthcoming[4]). Additionally, strong intersectoral co-ordination is necessary to regularly assess the efficiency and effectiveness of these tax treatments, ensuring they align with broader economic and fiscal objectives.
The implementation of an invoicing system for taxpayers under the preferential regime could strengthen the effectiveness and efficiency of the ICA. Unlike suggested tax returns, invoicing involves the tax administration directly issuing tax assessments based on available third-party and administrative data. These assessments then become enforceable collection instruments. This approach generates significant administrative efficiencies, as the resulting tax bill constitutes an executive title, eliminating the need for a separate official determination process and enabling a more expedited collection procedure.
Given the limitations in data quality and the need to minimise fiscal, reputational, and legal risks, implementing an invoicing system can be a more suitable alternative than requiring taxpayers to file returns on their own. By focusing exclusively on preferential regime taxpayers with taxable income between 1 933 and 3 500 Tax Value Units (UVT), invoicing can simplify compliance for small businesses while providing the administration with greater predictability and control over tax collection. This process would rely on exogenous information, data reported by third parties to the tax administration, complemented by statistical studies of taxpayers’ historical behaviour, to determine the taxable subject, base, rate, and applicable withholdings (Secretaría de Hacienda de Bogotá, 2024[5]). Eligibility would be restricted to taxpayers registered in the Registro de Información Tributaria (RIT, Tax Information Registry) with an active commercial registration, excluding deceased individuals, large taxpayers, and those under the Régimen Simple de Tributación (SIMPLE, Simple Tax Regime). The taxable base would be calculated from selected income items reported in exogenous data, under the assumption that all income corresponds to the taxpayer’s main economic activity and adjusted for reported withholdings. In addition, the complementary Avisos y Tableros tax would apply to taxpayers with at least one registered establishment open to the public (Secretaría de Hacienda de Bogotá, 2024[5]).
An invoicing system for the ICA can offer advantages in easing compliance, enhancing revenue forecasting, and improving administrative efficiency. On the one hand, it would simplify tax management for smaller taxpayers and allow the administration to initiate collections more directly and promptly. On the other, its effectiveness depends heavily on the availability and accuracy of exogenous data, which is prone to errors, inconsistencies, and reporting delays. Moreover, the methodology relies on significant assumptions regarding applicable tax rates and the complementary Avisos y Tableros tax, and taxpayers under preferential regimes often lack sufficient historical records to support robust statistical modelling. Extending the invoicing approach to larger taxpayers would entail substantial fiscal risks, as errors in calculating their liabilities could have a disproportionate impact on revenue outcomes.
Tax evasion and avoidance of the ICA show an upward trend from 2018 to 2022 (Figure 4.6). Total evasion without withholdings have increased from 17.8% in 2018 to 20.2% in 2024. This trend suggests potential inefficiencies in tax collection mechanisms, particularly during periods of economic disruption.
Note: p: provisional. pr: preliminary. The current estimation methodology of tax evasion and avoidance uses aggregate national accounts data that do not allow to identify individual evasion or avoidance. From this perspective, numbers shown here are relevant only at high aggregate level.
More precise and transparent methods for assessing ICA tax evasion could help improve understanding of compliance patterns and support efforts to enhance fairness and efficiency in the tax system. The current methodology for estimating tax evasion and avoidance relies on aggregate national accounts data, which do not allow for the identification of individual cases of evasion or avoidance. From this perspective, the figures presented here are relevant only at a high aggregate level. Shifting towards a more micro-level approach could improve the understanding of taxpayer behaviour and support efforts to reduce evasion and avoidance. In other countries, tax evasion and avoidance are often estimated using primary information from taxpayers. This can involve directly analysing data from other tax returns (such as national income tax) or collecting information from a sample of taxpayers.
Strengthening the methodology for measuring tax evasion and avoidance and enhancing oversight mechanisms can help distinguish between legitimate fluctuations in tax obligations and deliberate attempts to evade taxes. A company may adjust its rates every two months due to changes in its activities, which in turn affect the taxable base. These variations in taxable amounts do not necessarily indicate tax evasion but rather reflect the periodic adjustments in business operations and the corresponding tax obligations. This underscores the importance of addressing tax evasion through improved monitoring and enforcement measures.
References
[3] Gascon et al. (forthcoming), Investment Tax Incentives in Latin America and the Caribbean: An analysis using effective tax rates.
[4] OECD (forthcoming), Tax Incentive Policymaking: A Practical Guide, OECD Publishing, Paris.
[6] Secretaría de Hacienda de Bogotá (2024), ICA evasion and avoidance by economic activity and total, 2018–2022 (internal document).
[2] Secretaría de Hacienda de Bogotá (2024), Local Firm-Level Data (internal document).
[5] Secretaría de Hacienda de Bogotá (2024), Metodología de facturación electrónica (internal document).
[1] Secretaría de Hacienda de Bogotá (2024), Number of ICA rates in Colombian cities (internal document).
← 1. Specific activities related to sector and subsector codes can be consulted in the Classification of Economic Activities CIIU Revision 4 adapted for Colombia, available here: https://linea.ccb.org.co/descripcionciiu/.