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The Finance Ministry is facing a NIS 2.3 billion hole in the annual state budget for 2009 and 2010 due to Knesset resistance to approving VAT on incoming foreign tourism and fresh produce.

The coalition members oppose charging VAT on produce, which would bring in an estimated NIS 1.8 billion in annual revenues.

Yisrael Beiteinu, meanwhile, is threatening to vote against the budget unless the proposal to charge foreign tourists VAT on goods and services is withdrawn. This tax would bring in an estimated NIS 500 million annually.

According to the buzz in the Knesset, the treasury will offer to swap these clauses with a 0.5% across-the-board VAT hike. As it is, the Finance Ministry wants to raise VAT from its current 15.5% to 16.5%. This would put it at 17%.

On Thursday night, after 12 hours of lively debate, the Knesset House Committee voted to peel off some 20 items in the Economic Arrangements Bill - about half the total - from the budget bill itself. The line items were divided up among the Knesset finance, economic, labor and welfare, interior and environment, and constitution, law and justice committees. Treasury officials fear most of the items will be buried in the committees for a long time.

Some of these items have expiration dates. This includes the Israel Lands Administration reform, which must pass by July 15, like the budget itself; the communications media reform and the switch from franchises to licenses (November 30); and the creation of a fifth health maintenance organization (January 15).

The undated items involve the Civil Aviation Authority, transferring responsibility for accident victims from the insurance companies to the HMOs, expanding the authority of the Finance Ministry banks supervisor, and canceling the government commitment to build a hospital in Ashdod.