It's Official: Tourists to Start Paying Value-added Tax Starting June 1

Move pushed forward by Finance Minister Yair Lapid will bring the government an extra NIS 300-400 million annually.

Moti Bassok
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Finance Minister Yair Lapid announced on Monday that he would push forward his plan to charge tourists value-added tax, including on hotel rooms, starting June 1, .

The move will significantly raise prices for tourists, who have to date been exempt from paying VAT on hotels, travel services, gifts and other durable goods.

Israel currently charges 17 percent VAT, but that rate that will go up to 18 percent on June 1, just as the exemption for tourists ends.

Rescinding the exemption requires Knesset approval, but the treasury plans to bring the legislation to lawmakers this month and fast-track it through the three required readings by June 1.

Ending the exemption for tourists will bring the government an additional NIS 300 million to NIS 400 million of tax revenue annually, treasury officials said on Monday.

It is one of a long list of painful measures that officials have been forced to take in order to close a yawning budget deficit for 2013-14, one senior official said. He noted that most Western countries typically do not provide these types of tax exemptions to tourists.

But hotel owners, reacting to reports last week that Lapid planned to end the exemption, warned that hotel rates would rise in tandem with the new tax, making Israel’s already high hotel rates even less competitive with those in other travel destinations.

“The treasury is aiming a guided missile straight at the heart of the tourism industry and the first that will be hurt are the workers,” said Ami Federman, president of the Israel Hotels Association.

The new tax comes at a tumultuous time for the Israeli tourism industry. Last moth the government approved the Open Skies agreement with the European Union, a controversial deal which promises to open the industry to competition by bringing down airfares and increasing the number of flights to Israel over the next several years. Meanwhile, the industry is also being forced to cope with growing tensions between Jerusalem and Damascus over alleged Israeli raids on Syria.

In addition, the shekel has strengthened some 12% against the dollar in the past half year, despite efforts by the Bank of Israel to stem it. That has been effectively increasing the cost of an Israeli holiday for foreigners even without the repeal of the VAT exemption. The peak season for foreign tourism typically gets under way at the end of June.

“We are coping with tensions in the north of the country, the international debate over chemical weapons in Syria, a stronger shekel than ever, all of which deters people from visiting the country,” Federman said.

Federman also complained about what he termed “unreasonable taxes” such as municipal rates that are five times the average in Europe for hotels. “Incoming tourism is an export industry, while outgoing tourism is an import,” he said. “You impose taxes on imports, not on exports.” 

Tourists on a Tel Aviv beach.Credit: Tali Meir
Yair LapidCredit: Michal Fattal