VAT Hits 18% High for Third Time in Israel's History

With the government facing the challenge of closing a gaping budget deficit, the Israel Tax Authority says Sunday's VAT increase will generate NIS 4.4 billion a year in new revenues.

The value-added tax rate rose from 17% to 18% at midnight last night. This is the third time since VAT was introduced in 1976 ‏(at 8%‏) that Israeli consumers will be paying 18%. VAT has never exceeded this rate, and was previously raised to the 18% high during periods of economic difficulties.

With the government facing the challenge of closing a gaping budget deficit, the Israel Tax Authority says Sunday's VAT increase will generate NIS 4.4 billion a year in new revenues.

In January 1991, the VAT rate increased from 16% to 18%, for two years, and then lowered to 17%. In June 2002, it was increased again, from 17% to 18%, but reverted to the prior rate in March 2004.

Some economists take issue with the projection that the new 1 percentage point increase will raise NIS 4.4 billion a year, saying the state’s extra tax take will be much smaller, especially if the economy slows following the imposition of proposed government spending cuts and tax increases. They say the measures will deliver a blow to consumer spending power.

Due to today’s VAT hike, the Agriculture Ministry adjusted the price of price-controlled dairy products and eggs. The new price of a liter of 1% milk sold in a plastic bag is NIS 4.95; for 3% milk it is now NIS 5.28. The comparable prices for liter cartons of milk are NIS 6.11 and NIS 6.54. The price of 100 grams of butter is now NIS 4.08, and consumers will be paying NIS 4.60 for 100 grams of hard “emek” cheese.

The maximum selling price for gasoline increased at midnight, in part due to the increased VAT rate. It was also due to the higher cost of gasoline in Europe, to which the price ceiling here is pegged, and to the decline of the shekel against the dollar over the past month. Motorists are now paying a maximum NIS 7.52 a liter for self-serve 95 octane gasoline, which is 26 agorot more than in May.

VAT, which unlike U.S. sales taxes is not tacked on at the cash register but included in the stated price of merchandise, is considered a regressive tax since it has a greater impact on poorer consumers with their lower purchasing power.

In the past, the state relied more heavily on direct taxes such as income tax and corporate tax for its revenues than indirect taxes such as VAT. Now, however, indirect taxes − including VAT and other purchase taxes − account, in absolute terms, for as large a source of revenue as direct taxation. This is not the case in most of the developed world and, critics say, reinforces economic inequality here.

The reduction of direct taxation and increase in indirect taxes has resulted in relatively low direct tax rates here but relatively high indirect taxes. Attempts to impose VAT at differential levels depending upon the product or service involved have not been successful, largely due to the opposition of the Tax Authority.

Rami Shlush