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Prime Minister Benjamin Netanyahu is once again considering imposing value-added tax on fruits and vegetables. But unlike last year's proposal to levy full 16.5% VAT on produce, a move that generated broad opposition, this time Netanyahu wants a tax of only 1%.

The new proposal, which was announced in an internal meeting last week, is intended to improve reporting for tax purposes.

Fruits and vegetables are currently exempted from VAT altogether, and changing this will require Knesset approval. Netanyahu did not set a timetable for the proposed bill, but sources say that it may be considered during the deliberations on the 2011 state budget.

A 1% VAT will generate revenues of about NIS 100 million, but Knesset sources said this is not the primary aim, but rather enforcing regulation on the produce sector.

Because fruits and vegetables are exempt from VAT, regulators believe that people who have multiple operations, including one in an industry subject to VAT, may report the revenue from that business as coming from fruit and vegetable sales, in order to avoid paying VAT. The 1% tax will make it easier for authorities to regulate the industry, particularly given the trend of shifting to paper-free invoices.

The idea of differential VAT rates faces broad opposition within the Finance Ministry, and naysayers maintain that a single rate of 16% should be applied to all sectors. Nevertheless, sources believe there will be minimal opposition to a 1% tax, due to hopes of improving income reporting. Knesset sources say the move could open the door for future tax hikes on fruit and vegetables, once the initial idea gains approval.

Unlike the broad opposition that the idea provoked last year, due to the implications of such a move for poorer consumers, VAT of just 1% will undermine the argument of opponents of the prior plan, since the effect on consumer prices will be minimal, Knesset sources say.

Steinitz won't object

In June 2009 the government tried to levy a 16.5% VAT tax on vegetables, but objections from economists and political activists alike halted the move. On July 7, Netanyahu announced that the decision had been rescinded, citing public demands.

Finance Minister Yuval Steinitz expressed dissatisfaction with Netanyahu's decision. "Exempting fruits and vegetables from VAT distorts the market, and this should have been fixed," Steinitz said at the time. Based on Steinitz's past comments, Knesset sources say he is not expected to object to Netanyahu's current proposal.