Israel's Gas and VAT Set for Back-to-back Rises

Tax set to rise to 17% at Friday midnight and 95 octane gas by 7% a day later.

Consumers face an unusually unpleasant weekend for their pocketbooks. At midnight tonight value-added tax goes up by one percentage point to 17% - an increase that will affect the price of everything from most foods to electrical goods, gasoline and services. Twenty-four hours later, the price of gasoline rises a second time, as state-controlled prices are adjusted to reflect rising energy costs internationally.

The price for a self-service liter of 95 octane gasoline increases 55 agorot, or 7.1%, to NIS 8.25 tomorrow. That will be a new record high, exceeding the NIS 7.79 a liter reached in April. The charge for a station attendant to fill your tank will add an extra 16 agorot a liter to this price.

The price hikes are another blow to consumers, who have been treated to a steady diet of rising taxes and higher prices. Rising world commodity prices have begun making their way to store shelves in Israel: Government-controlled bread prices were raised 6.5% earlier this month, and food and soap manufacturer Unilever Israel said nearly two weeks ago it planned to raise its prices by 5% to 6% after the High Holy Days. Other food makers are expected to follow suit.

The higher price for gasoline marks a change in attitude on the part of Prime Minister Benjamin Netanyahu, who acted last spring to prevent the price from pushing past NIS 8 a liter. In March, he intervened and instructed officials to reduce fuel tax by 10 agorot a liter, thereby preventing prices from reaching NIS 8.05. The reduced tax rate kept the price for self-service to NIS 7.74 and for a full service at NIS 7.95. In April, following another planned rise in the gasoline price, the tax was cut another 15 agorot a liter, keeping the cost of self-service fuel at NIS 7.79 and full-service at exactly NIS 8.

This weekend's price hike on gasoline comes in two parts. The first is a seven agorot increase that goes into effect at midnight tonight to reflect the rise in VAT. On Saturday night, the price will go up a second time, now by an additional 48 agorot, to reflect the actual hike in state-controlled energy prices. That second and more painful price rise is in line with the 14% increase in gasoline prices in Europe in the past month, which serves as the basis for controlled prices in Israel. The dollar depreciated some 1.6% against the shekel in the past month, but the impact of that on the price of gasoline will be minimal.

The excise tax on gas is rising two agorot to NIS 2.99 a liter, reflecting the inflation rate. VAT will total NIS 1.20, a rise of 14 agorot, half from the increase in the VAT rate and the rest from the increase in the price. All told, the tax on gas will be NIS 1.49, just over half the price to the consumer.

The impact of the VAT increase is harder to predict, as some retailers and manufacturers may choose to absorb the cost. But in the food market, sources said the increased tax will indeed be passed on to consumers either now or after Rosh Hashanah.

"Super-Sol has been leading the food retail segment in the past several months with significant discounting and by rejecting suppliers' demands to raise prices," Israel's biggest retailer said. "Super-Sol will not be the first to raise prices. [But] raising the VAT rate is a government decision and its proceeds do not go to the company - not one agora."

A senior executive at another food retailer, who spoke on condition of anonymity, said his company would act in line with what Super-Sol did.

A senior executive at a medium-sized chain, also speaking anonymously, said Super-Sol was acting irresponsibly by raising prices before the Rosh Hashanah holiday.

But another executive said the impact would be minimal for holiday shoppers. "On half the products there are going to be sales ahead of Rosh Hashanah, so the VAT on them really won't be raised until later," he said. "Prices of goods not being put on sale will go up Sunday. In any case, fresh fruits and vegetables won't rise because they aren't subject to VAT."

At discount retailer Rami Levi and at the natural food chain Eden Teva Market, managers vowed not to raise prices for VAT until after Rosh Hashanah. But Levi said shoppers should take the increases in their stride: In the past year, since the social-justice protest last summer, food prices have been stable and even now the situation won't be as bad as it was before the protests broke out.

At consumer electronics and appliance stores, prices will also rise to reflect the VAT increase even though they have already been boosted between 5% and 10% in the past month to reflect a stronger dollar. "At the moment, we're not expecting any further prices increases, except for VAT," Tzvika Gior, one of the owners of the appliance chain Newpan. "There's no reason to raise prices again."

When does VAT go up?

Not every product liable for VAT will rise next week. In more competitive sectors, manufacturers and retailers are more likely to absorb most or all of the cost. Those businesses that choose to raise prices solely on the basis of higher VAT should only be increasing them by 0.86%.

As a rule the price of a product, including the VAT rate, is set at the time the buyer and seller agree on a sale, even if the product or service is delivered after the rate has risen. There are some exceptions, such as in the travel industry where contracts usually state that the price is subject to change based on VAT. But the courts have said VAT is a two-way street: The price must come down if it is cut.

On the other hand, businesses themselves pay the VAT according to the rate on the day of delivery, so they may try to pass that on to the buyer. Check the contract to see whether it has a specific clause on the matter.

If it is a product being paid for in installments, the VAT rate in force at the time of delivery remains on all future payments. However on a service charged monthly or at some regular rate, the VAT rate changes.

A gas station in Haifa.
Moran Maayan
The road to record high gas prices