BRASILIA Brazil's consumption tax reform advanced on Tuesday as a working group in Congress outlined a proposal to combine various levies into a value-added tax with separate federal and regional rates without increasing the overall tax burden on the economy.

The report represents an early step in a reform considered crucial by President Luiz Inacio Lula da Silva's administration. Lawmakers will now craft a formal text in greater detail to be put to a vote.

Congressman Aguinaldo Ribeiro, the lawmaker in charge of the working group report, said the lower house of Congress would vote on a bill in the first week of July, citing a timeline approved by House Speaker Arthur Lira.

According to the working group's proposal, the reform would merge federal taxes on consumption – namely IPI, PIS, and Cofins – into one tax, while the state-level ICMS tax and municipal-level ISS tax would combine to form a separate rate.

The working group's report recognized the possibility of exemptions in the standard tax rates, including a reduced rate for some goods and services related to health, education, public transportation, regional aviation and rural production.

The text also proposed the implementation of a different treatment of food items included in a government-designated list of essential products.

Under the recommendations, tax collection would shift from the current practice based on where goods are produced to a system reflecting where goods are consumed.

This adjustment is expected to benefit wealthier and more populous states, and the working group proposed a transition period of "some years" for implementation.

"The transition will be made in such a way as to maintain the collection of current taxes as a proportion of GDP (gross domestic product). Under no circumstances will there be an increase of the tax burden," the report said.

(Reporting by Marcela Ayres; Editing by Jamie Freed)