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Finance Minister Yuval Steinitz is threatening to withdraw the state budget draft in the event that the Knesset balks at imposing value-added tax on fruits and vegetables.

Unnamed Knesset sources said yesterday that his comments were aimed at pressuring MKs into supporting his proposal.

Steinitz's remarks came during a closed session convened by Prime Minister Benjamin Netanyahu to discuss the main obstacles the government faces in gaining approval for its state budget and supplementary Economic Arrangement bills.

The meeting was attended by Likud figures Netanyahu, Steinitz, Minister of Environmental Protection Gilad Erdan, Knesset Economic Affairs Committee chairman Ofir Akonis, coalition chairman Zeev Elkin, Likud party whip in the Finance Committee Zion Pinyan, and the director general of the Prime Minister's Office, Eyal Gabai.

The Finance Ministry estimates that imposing VAT on fresh vegetables and fruit would bring in an additional NIS 1.8 billion in tax revenues annually.

The consensus at the meeting was that the government will find it very difficult to obtain a majority to lift the exemption currently in place, in light of Shas's adamant opposition. Erdan said that if Likud fails to get the majority it needs to pass the measure, not only will the ruling party not obtain approval for this important move but it will also attract criticism as the party that attempted to levy tax on fruits and vegetables.

VAT on fruit and vegetables has become a symbolic issue, Erdan added. He suggested that as an alternative, the implementation of tax cuts that are planned to go into effect in the beginning of 2010 be postponed.

Elkin emphasized that the government faces difficulties not only with the cancellation of the VAT exemption on fresh produce, but also with another law that the government is seeking to legislate, which aims to cancel a recent ruling by the High Court of Justice that recognized childcare expenses as tax-deductible.

Finance Committee Chairman MK Moshe Gafni called on the Finance Ministry yesterday to prepare an alternative proposal in coordination with the committee, to the taxation of fresh fruits and vegetables.

"Levying VAT on vegetables and fruit will not get through the committee. Therefore, it would be appropriate for committee members to actively participate in finding an alternative solution to the proposal."

The committee held a turbulent debate on the issue yesterday, during which it became apparent that opposition to the proposal within the committee is now unanimous, and includes MKs from coalition parties Likud, Labor, Shas, United Torah Judaism and Yisrael Beiteinu. The meeting was attended by stall-owners from the Carmel and Mahane Yehuda markets, in Tel Aviv and Jerusalem, respectively, as well as by the heads of the Farmers Federation and their lobbyist Keren Barak, who was a Likud candidate in the March Knesset election.

The Farmers Federation secretary general and former Meretz MK Avshalom Vilan said that farmers are simply not willing to bear the brunt of the state's budget difficulties. Rami Mizrahi, the owner of the Hashikma grocery chain, warned that consumers were the ones who would suffer from the move.

"Workers will complain to their bosses that one quarter of their food bill, which includes fruits and vegetables, has now become 17% more expensive, and will demand a wage increase. The employer will immediately raise prices in its own business to cover the added cost, and inflation is created." he said.