Fruit and Veg Tax Faces Homegrown Opposition in Finance Committee

The Knesset Finance Committee will discuss the Finance Ministry's proposal to cancel the VAT exemption on fruits and vegetables today. The committee is not expected to reach a decision, though, since the proposal will only be formally submitted in three weeks, as part of the Arrangements Law. Its proponents can thank the delay as the proposal is not currently supported by a majority of the committee.

Finance Committee chairman Moshe Gafni has already announced his opposition to the idea of imposing VAT on fruits and vegetables, as have Miri Regev and even Zion Pinyan, who serves as the coalition whip in the committee, charged with ensuring a majority in favor of all government proposals.

The Knesset debate will be attended by stall owners from Jerusalem's Mahane Yehuda market and Tel Aviv's Carmel Market. Also in attendance will be Rami Levy, the owner of the eponymous grocery chain. The Farmers Federation has hired lobbyist Keren Barak, who was too low on Likud's party list to make the 18th Knesset, to enlist MKs against the proposal.

"While farmers can be forced to charge VAT, they cannot be forced to farm," said chairman of the farmers' lobby, MK Shai Hermesh (Kadima). "VAT on fruits and vegetables will drag the entire agricultural sector into another crisis."

The Finance Ministry estimates that if all tax hikes that the government has approved of late are indeed implemented (including increasing VAT to 16.5%), an additional NIS 3 billion will be added to state coffers in 2009, and some NIS 8 billion in 2010, for a total of about NIS 11 billion.

The Finance Ministry warns that if the Knesset rejects the proposal to cancel the exemption of fruits and vegetables from VAT, overall VAT rates will have to be increased to 17% instead of 16.5%, as approved by the government. The VAT rate is currently 15.5%.

Increasing VAT should be one decree that doesn't particularly raise the ire of Knesset members. The Finance Ministry is planning on raising the tax very soon, possibly by July 1. Increasing VAT by 1.5% (to 17%) should increase state revenue in 2010 by NIS 5.25 billion - NIS 6 billion (and about half of that amount in 2009).

Alternatively, the treasury is seeking to reach an agreement with Shas and United Torah Judaism, offering to compensate the hike with NIS 300 - NIS 400 million to low income earners in exchange for the parties' support, after already proffering compensation of NIS 150 million in recent weeks.

Increasing this compensation, the Finance Ministry hopes, will remove opposition from Shas, United Torah Judaism and Likud parties, paving the way for a majority within the Knesset to cancel the exemption.