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Tax authorities have arrested some 30 people, including many in the South Tel Aviv textile industry, on suspicion of using fake receipts or none at all to hide NIS 50 million in income. The suspects may be part of a larger tax fraud that includes underpaying customs duties on imports from China and other countries, according to the Israel Tax Authority.

In an early-morning raid on March 19, some 150 tax investigators from the Jerusalem, Tel Aviv, Haifa, Petah Tikva and Be'er Sheva VAT and customs offices descended on the homes and businesses of the dozens of suspects. Among those arrested are suspected brokers of fake tax receipts. Some were released on bail with limits placed on their movement and activities.

The way the scam works, tax authority officials said, is that firms use the fake receipts to inflate their business expenses, which they then use to receive excessive VAT tax refunds and to lower their taxable income.

Cheating is especially easy and lucrative on textile imports from China. Since Israel has no trade agreement with China, all textiles from that country are subject to full customs duties, and one illegal way to reduce this cost is to file false documents stating that the goods cost less than they really did, said a source in the investigation.

The firm can then report this lower, false amount to the tax man and receive VAT refunds on it or list it as business expenses. But in the end, the goods are sold for the true, higher price, leaving a large gap between the firm's reported and actual income, on which it is supposed to pay taxes. (It also leaves the firm a sky-high profit margin. ) This is where the fake receipts come in, the source said - to cover up a lot of income and avoid paying taxes on it.

"The emerging picture is of a 10-armed octopus," said the source. "At the end of each arm is someone suspected of accepting fake invoices for tax purposes. The amount involved is estimated to be worth over NIS 50 million, which has been stolen from the state."