Embarrassment at Treasury: VAT Rise Delayed Till September at Cost of NIS 370m to Budget

Flexing muscles, Knesset's Gafni postpones hearing on increase.

Finance Minister Yuval Steinitz decided Tuesday to postpone the increase in value-added tax by a month. VAT will rise by 1% to 17% on September 1 instead of August 1. The delay will save taxpayers an estimated NIS 370 million in taxes.

Steinitz made the decision after he met on Tuesday to consult with MK Moshe Gafni (United Torah Judaism ), chairman of the Knesset Finance Committee. The postponement represents a failure of the treasury, and of Steinitz. By law, the Finance Ministry must consult with the Finance Committee before taking an action such as raising VAT, but due to the very tight schedule involved, this was not done in time. The meeting should have been held last week and the cabinet only approved the increase on Monday, but treasury officials waited on the meeting with Gafni until the very last minute, the day before the tax increase was to take effect. Gafni was furious and decided to show the treasury who is the boss - as set by law - and the consultation with the committee was put off until WEd.

The postponement of the committee's meeting with Steinitz until Wednesday caused legal problems for the Israel Tax Authority, as well as technical problems in implementing the tax increase. While Steinitz's legal advisers told him it was still possible to legally raise VAT as of Wednesday, the ministry also received numerous requests from businesses to delay the hike to allow them time to prepare for the change, including changing price lists and updating their accounting systems.

The cabinet approved a long list of tax hikes and spending cuts on Monday, including raising VAT and purchase taxes on beer and cigarettes - to bring in an additional NIS 3 billion by the end of this year. But the postponement of the VAT hike will cut NIS 370 million from this amount, and it is not yet clear what steps will be taken to make up for this shortfall.

The law states that the Finance Minister may sign the regulations raising VAT only after he has consulted with the Finance Committee. After he signs the regulation, it is published officially and takes effect immediately.

The full Knesset must then approve the increase within 14 days, and it will be approved retroactively. The Knesset will have to meet in a special recess session to approve the VAT hike as it went on its summer recess at the end of July.

Treasury officials invited Gafni for a consultation last Thursday, when they informed him of the various tax and spending proposals - only a day before the proposals were released to the public. Senior treasury officials, including tax authority head Doron Arbeli, also pressured Gafni to convene the committee on Tuesday for the consultation.

But Gafni refused to cooperate and hold the formal discussions with the committee Tuesday, which was to include both Steinitz and the governor of the Bank of Israel Stanley Fischer.

"A war didn't break out and we don't have to raise VAT from one minute to the next," said Gafni. "[The Knesset is in] recess and I could not call the committee immediately to discuss raising VAT."

Gafni praised Steinitz for the postponement, saying now it could be carried out in an orderly fashion and only after a serious discussion, including in the committee and Knesset.

Labor Party chairwoman Shelly Yacimovich said the postponement was just another hysterical and indecisive act by Prime Minister Benjamin Netanyahu and Steinitz in recent days.

"This is just more evidence that Netanyahu's economic decrees were formulated in panic and are being carried out with negligence," she said. Netanyahu's behavior is dangerous and is damaging the economy and growth, she said.