Home buyers will have to show they have done military or civilian national service in order to qualify for an exemption from the value-added tax, the Finance Ministry said on Sunday.
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The criteria, which were established after weeks of discussions between treasury officials and the attorney general’s office, will apply to first-time buyers purchasing a new home costing up to 1.6 million shekels ($460,000), including VAT. With VAT currently at 18%, the exemption would provide badly needed price relief for home buyers.
Those who have not done military or civilian service will also qualify for the exemption, the Finance Ministry said, but it will be limited to homes that cost no more than 600,000 shekels, including VAT.
Together with another program called target price plan, VAT relief is the centerpiece of the government’s efforts to rein in rapidly climbing home prices. But while the cabinet approved the plan in principle in March, the attorney general had warned that conditions that didn’t apply to all Israelis risked a court challenge.
“The matter was the subject of lengthy discussions, with the attorney general refusing to accept criteria that would not apply to all segments of the population,” the Finance Ministry said in a statement. “The Finance Minister insisted that clear and significant priority must be given to those who contributed to the country by serving in the army or civilian service.”
Unlike military service, all Israelis may perform civilian national service.
The performance of national service is not the only criterion for obtaining the VAT exemption.
Additional criteria for eligibility include being a married or common-law couple with at least one child or a single parent. In the case of a couple, neither spouse may have owned a home previously or have canceled a contract to buy one, the treasury said.
In order for a childless couple to qualify for the benefit, at least one of its members must be over 35 years old. That is also the age at which singles qualify for the VAT exemption, the treasury said. In addition, anyone receiving a permanent disability allowance or who has a disability rating of 75% or more can also qualify.
In all cases, a government assessor must certify that the property meets all relevant criteria before the exemption is issued.
A draft of the proposed law is expected to be published for public comment within a few days, the treasury said.
But already on Sunday, Housing and Construction Minster Uri Ariel criticized the lower price ceiling for prospective home buyers who have not performed either military or civilian national service. He said that few homes in Israel sell for 600,000 shekels or less, including VAT.
“There’s room for awarding a bigger benefit to those who have performed army service or national civilian service,” Ariel said, but added that the price ceiling for those who have not should be raised to 950,000 shekels.
Ariel praised the VAT exemption plan overall, but the idea has been come under intense criticism since it was first raised, in March. Critics say that by making homes more affordable for more people, it will increase demand and could push up housing prices further.
Israel Discount Bank said on Sunday that housing starts would likely decline in the next few months, due to uncertainty in the market about the VAT exemption program as well as the target price plan. Under the latter program, the state would sell land to developers at a discount; the developers, in turn, would commit to selling the homes built on these lots for lower prices.
“As long as the uncertainty continues, the decline in housing starts is likely to deepen,” Israel Discount Bank chief economist Nira Shamir said in a report. But she said the deceleration in the rise of home prices – prices climbed 6.3% in the last 12 months – would continue.
“Unfortunately I see in the VAT cancellation a great deal of confusion and stunning inability,” said Erez Cohen, chairman of the Property Assessors Association, pointing to the requirement that properties be assessed before the buyers win VAT exemption.
“I see huge difficulties, red tape and endless arguments resulting.”
MK Itzik Shmuli (Labor), a member of the Knesset Economic Affairs Committee, warned that even the new criteria would have trouble winning approval from lawmakers. He called for less discrimination in the criteria for VAT exemption.
“[Finance Minister Yair] Lapid knows very well that these criteria will get deadlocked both in the Knesset and in the High Court of Justice, but he nevertheless chose to go through with them,” Shmuli said. “That’s not how someone pushing to solve a problem behaves, but rather someone who is looking for headlines.”
Sivan Aizescu contributed to this report.