Netanyahu Backs Zero VAT on Basic Food Items

Measure opposed by treasury and Bank of Israel.

Moti Milrod

Prime Minister Benjamin Netanyahu agreed Thursday to support a plan for exempting all food subject to government price controls from the 18% value-added tax.

Netanyahu consented to the controversial plan, which he briefly spoke in favor on early in the election campaign, after Arye Dery, leader of the ultra-Orthodox Shas party, conditioned his joining the government with his seven Knesset seats on the exemption being part of the coalition agreement.

Eliminating VAT on price-controlled products, which include basic items like milk and bread, will cost the government some 1 billion shekels ($250 million) in revenues annually and has elicited strong opposition from economists at the treasury and the Bank of Israel. Israel has almost no exemptions or discounts on VAT, so creating a differential tax will require stepped-up supervision.

Moshe Kahlon, the finance minister designate, also opposed the exemption and had sought to waylay it by referring to a committee that would have included him and Dery on it. But Dery rejected the compromise. Kahlon’s office declined to comment.

Dery, whose Shas party ran on a socioeconomic platform, had put exempting basic food from VAT as a key campaign demand. Economists, however, say the exemption will help wealthy and middle class consumer at least as much as the poor.

Earlier Thursday, Dery agreed to give up his demand for the Interior Ministry. That means he will likely get the Economy Ministry in its place as well as the Social Welfare Ministry for another Shas appointee. As economy minister he will sit on the committee that appoints labor court judges even though he was convicted of taking bribes and served 22 months in prison.