Brazilian President Luiz Inacio Lula da Silva has unveiled a plan to exempt workers earning less than BRL5,000 ($880) monthly from income tax, fulfilling a key campaign promise as he struggles with low approval ratings.

The tax reform bill, presented to Congress on March 18, would benefit approximately 13.4mn formal workers, representing 32% of Brazil's workforce, according to the Finance Ministry.

This comes in addition to more than 10mn who already qualify for exemption under the current threshold of BRL2,824.

"This is a neutral project. It won't increase the country's tax burden by a cent. What we're doing is just making amends," Lula said during the announcement in Brasilia.

To offset the revenue loss, estimated at BRL26bn ($4.6bn), the government proposes increasing taxes on about 114,000 Brazilians at the top of the income pyramid. These people represent 0.06% of the population and earn more than $105,000 annually. According to the cabinet, this would generate BRL34.12bn. 

The president, whose popularity hovers around 24% – the lowest figure across his three terms – hopes the measure will boost his support among middle-class voters.

"Now it's worth it," Lula proclaimed, adding he was convinced Parliament would support the measure "so that the Brazilian people can have a real return on their wages and their lives improve."

Brazil has a deeply regressive tax system where direct taxes, paid regardless of income, mean poorer citizens contribute proportionally more than the wealthy.

Additionally, dividends that companies pay shareholders are currently tax-exempt.

Under the proposal, workers earning between BRL5,000 and BRL7,000 would also benefit from partial tax discounts.

According to a report by O Globo, the proposal's projected BRL8bn ($1.4bn) surplus has raised questions about fiscal motivations.

However, Treasury Executive Secretary Dario Durigan insisted the government is "not seeking a primary surplus with this measure" but rather demonstrating fiscal neutrality.

Chamber of Deputies Speaker Hugo Motta, meanwhile, indicated lawmakers will likely modify the proposal before approval.

If approved without significant changes, 90% of taxpayers would be fully or partially exempt from income tax.

Finance Minister Fernando Haddad has insisted the proposal is "fiscally neutral" despite market concerns about potential fiscal imbalance when he first outlined the measure last November.

If greenlit this year, the new tax structure would take effect for the 2026 tax return, just ahead of the presidential election scheduled for later that year.