Lapid's Plan to Charge Foreign Tourists VAT Slammed by Tourism Ministry

Finance Minister's proposal to remove VAT exemption would likely bring another NIS 300 million to NIS 500 million into state coffers annually, but ministry director general says Israel is already an expensive destination.

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Sharing the tax burden apparently applies to foreign tourists, too: Finance Minister Yair Lapid has proposed cancelling the value added tax exemption currently in place for overseas visitors. The move is likely to bring another NIS 300 million to NIS 500 million into state coffers annually, but was criticized Thursday by the Tourism Ministry.

Currently, foreign tourists pay no VAT on hotel stays and related services, transport, car rentals and large purchases. The policy has been in place for years. There were previous attempts to drop this exemption ‏(also not offered by all Western nations‏). However, the initiatives were abandoned amid arguments that this would discourage tourism, and that Israel is already an expensive country for tourists.

However, the government is desperately looking for ways to cut the national budget and boost revenues. Another notion to have crossed government minds more than once is to abolish the VAT break on fresh fruit and vegetables. One obstacle to this idea is the difficulty in enforcing the change, if it is made, in outdoor markets. VAT is presently 17%. Unlike sales tax in the United States, it is included in the stated price at regular stores rather being added at the cash register. And plans are afoot to raise the value added tax rate to 18%. [See coverage above].

The Tourism Ministry on Thursday slammed Lapid’s mooted plan. “Imposing VAT on tourism services will make us one of the most expensive countries in the world, which will significantly reduce the number of tourists,” wrote Noaz Bar-Nir, director general of the Tourism Ministry, in a letter to Prime Minister’s Office director general Harel Locker, Finance Ministry director general Yael Andorn, and Finance Ministry budget director Gal Hershkovitz. Given Israel’s geopolitical problems, he added, the country can’t afford to further turn off potential travelers.

According to the World Economic Forum’s 2012 report on global tourism competitiveness, Israel ranked 133 out of 140 countries in terms of how much it costs to visit − meaning that, on average, it is one of the priciest vacation destinations, although obviously the price of accommodation and tourist services varies.

“Prices in Israel are expensive primarily due to taxation and regulations that don’t exist in other OECD nations,” Bar-Nir wrote, in reference to the grouping of the world’s developed economies, including Israel. His ministry has been campaigning heavily for the government to lower tourism costs; imposing VAT will severely undermine that. Adding the 17% VAT on tourism services will make a holiday in Israel 6.3% to 7.4% more expensive than it is now, Bar-Nir noted, and that reports indicate that it would cut the number of foreign tourists somewhere between 240,000 and 270,000 a year.

Yair LapidCredit: Michal Fattal

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