Israeli Ministers Approve Plan to Cut VAT for Home Buyers

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Housing construction in Israel is not keeping pace with demand, and ministers worry that the VAT exemption for first-time buyers will be counterproductive to lowering prices..Credit: AP

The Ministerial Committee on Legislation approved Monday controversial legislation to exempt first-time buyers of new homes bought directly from contractors from value-added tax.

The Knesset is expected to approve the legislation by the beginning of August, before it takes its summer recess, enabling the law to take effect September 1. Finance Minister Yair Lapid’s flagship proposal for lowering housing prices is expected to cost the government some 2.4 billion shekels ($690 milion) in lost tax revenues.

“The zero-VAT benefit is intended to allow young middle-class couples, who work and serve, to purchase a home in the near term. We will continue to act to lower housing prices,” said Lapid, who has sought to position himself as the standard-bearer of Israel’s middle class.

The legislation has had a bumpy ride since it was first proposed by Lapid. Many economists, including the treasury’s chief economist, said it would have the exact opposite effect of its goal and raise home prices by creating extra demand. The terms of the plan, which creates two tiers of exemptions between those who have or have not served in the army or civilian national service, came under fire for effectively discriminating against Haredim and Israeli Arabs.

MK Itzik Shmuli (Labor), a member of the Knesset Economic Affairs Committee and chairman of the social housing lobby in the Knesset, said the main problem with the proposed law, despite the improvement in the eligibility criteria, is that it still creates huge expectations among young couples despite the fact that there aren’t enough homes available on the market for them.

“The minute people understand this they will get off the fence and the freeze [in the housing market] will turn into a flood and an attack on the real-estate market, which will lead to a rise in prices,” said Shmuli.

The law will apply to new homes worth up to 1.6 million shekels for those who have served in the military or civilian national service for at least 12 months. For those who have not served at least one year, whether in military or civilian service, the ceiling for the tax break will be limited to 950,000 shekels, a figure that was raised from 600,000 shekels in the original plan after complaints that the amount was so low as to effectively preclude those who qualify for it.

Even with the higher ceiling, the legislation is likely to face a challenge in the High Court of Justice.

Families or single parents with at least one child will be eligible for the benefit, or those where one of the couple is at least 35. There are also restrictions on the per-square-meter price of homes eligible for zero VAT, based on calculations to be made by the government assessor for each region of the country.

The ministers held a long debate before approving the tax breaks, during which some ministers raised questions about how the law could be implemented quickly and efficiently given its complexity. Nevertheless, five ministers voted in favor, including three from of Lapid’s Yesh Atid party – Lapid himself, Health Minister Yael German and Science and Technology Minister Jacob Perry. Agriculture Minister Yair Shamir and Housing and Construction Minister Uri Ariel also supported the bill.

Two Likud ministers, Limor Livnat and Gideon Sa’ar, left before the vote, while committee chairman, Justice Minister Tzipi Livni, abstained, saying she had doubts about the complexity of the law’s terms. Livni said she had supported the bill when the meeting started, but the issues raised during the deliberations that followed prompted her to abstain, though she said she would not act against the law.

The treasury said it would provide a form on its website to allow people to asses their eligibility, while remaining anonymous. If they are found to be eligible, they will need to declare that all the information is correct and have a lawyer certify the document. These documents would then be presented to the property tax authorities. At the same time, the contractor must also check to see if the house to be sold meets the criteria, the treasury said.

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