Analysis

Israeli Fashion Chain Collapses, Reigniting Campaign for Tax Exemption on Online Purchases

Competition in retail is good, but it’s not fair when one side pays a tax and the other doesn’t

A Honigman branch in Azrieli Mall, Tel Aviv.
\ Eyal Toueg

The collapse of the Honigman fashion chain last week has breathed new life into the Israeli Federation of Chambers of Commerce’s campaign to end the exemption from the value-added tax on online purchases made abroad.

“The responsibility is yours alone – stop the collapse,” the organization said in ads directed personally at Finance Minister Moshe Kahlon. The appeal, however, is unlikely to work. Finance Minister Moshe Kahlon is loath to raise taxes and imposing VAT on the popular option of online shopping is unlikely to be an exception.

As recently as 2011, according to figures from Israel Post, online shopping was a marginal affair, with 18-20 million packages delivered. By last year, the figure had jumped to 61 million, an increase of more than 19% in that final year alone.

How much is the average order? Israel Post says it doesn’t know but let’s say it is $50. Last year that added up to purchases of 10 billion shekels ($2.9 billion at current exchange rates). Tel Aviv Strategic Consulting, a research house, estimates personal imports are probably even more, something like 12 billion to 15 billion shekels a year.

But as much as online buying has grown, it’s only the tip of the iceberg: TASC estimates it accounts for just 6% of all retail spending, which means there’s a lot more room for growth. With Israel’s high cost of living, the typical Israeli consumer is going to find the idea of paying less for products online especially tempting.

Antitrust regulators welcome the competition, too. “In the framework of the limitations of a small economy, many business sectors in Israel are characterized by high levels of concentration. The problem exists even in sectors open to import competition and is reflected in the growing profitability of importers and other sectors,” the Antitrust Authority wrote in its report on the issue of personal imports.

“The expansion of online retail worldwide creates an opportunity for a personal-import revolution that creates competition for commercial importers and local producers,” it added.

That authority is right. At last the Israeli consumer is being liberated from the grip of local retailers and the high prices they can command in lieu of retail competition. It’s no surprise that the Chamber of Commerce is campaigning to end the VAT exemption, but it comes as a surprise to say that they have a point.

TASC research found that online shopping has grown because of the low prices it offers, the wider selection of products and the ease with which you can place an order. On the other hand, for bricks-and-mortar wholesale prices are high because importers themselves face little competition. 

In addition, rents at malls are expensive, labor costs are high and the government has erected a host of barriers that make importing difficult – the meticulous requirements of the Standards Institute and the relevant ministries as well as the bureaucracy of the customs regime. Whatever advantages commercial importers have from economies of scale is probably lost in the red tape they face.

A product sold online can cost half of what it does on an Israeli store shelf. And to that, the government slaps a 17% value-added tax.

There are any number of reasons behind the collapse of Honigman, but competition from personal imports is certainly one of them. Other fashion retailers will probably follow Honigman on the path to bankruptcy: 60% of personal imports last year were for apparel and shoes.

The VAT factor shouldn’t be underestimated. The Israel Post data show that the growth in online shopping began to gather momentum in 2012 when the exemption was raised to $75 from $50. Today, 95% of all personal imports are for less than $75.

That kind of competition is unfair because local retailers can’t do anything on their own to reduce it. Should the Israel Tax Authority be the one to tilt the scale in favor of imports?