Taxman Suggests Giving Smaller Businesses More Time to Pay VAT

Finance Ministry mulling differential tax on staples: food, drugs.

Small businesses and the self-employed may receive a bit of relief, if a proposal to allow them to delay paying VAT passes parliament.

The Tax Authority is recommending that freelancers and businesses with revenues of up to NIS 20 million a year be allowed to delay VAT - value-added tax - payments by up to two months.

The proposal aims to resolve a painful problem for Israel's small businesses, most of whom have to pay VAT before they receive the invoiced sum from their clients.

Israeli businesses tend to receive payment based on "shotef + 30" - "current + 30," which means, from the invoice date to the end of the month plus 30 days, or even "shotef + 60." But their tax payments are not predicated on having received the money: Payment must be made whether the business has received the money from the client or not.

The taxman is assuming that the two-month delay will allow almost all eligible businesses to receive payment from their clients before they have to pay their VAT bill.

Of course, some businesses only receive "current + 90," but that is relatively rare.

The tax officials believe the change would affect 99% of service providers in Israel. While the big companies such as the gasoline companies and cellular operators would be excluded, it would cover most of the nation's service providers and professionals, from carpenters to doctors, accountants, fishmongers, artisans and lawyers.

As things stand, small businesses and service providers sometimes have to borrow money to pay their VAT bills. They would be spared this need if this idea becomes reality.

Why exclude the big companies, which turn over more than NIS 20 million a year? Because they may comprise only 1% of service vendors, say tax officials, but the cost to the state treasury would quintuple from about NIS 290 million a year under the present proposal, to about NIS 1.5 billion a year.

While Finance Minister Roni Bar-On is reportedly smiling on the idea, it would require a legislative amendment through the Knesset.

The recommendation was compiled by a committee that tax commissioner Yehuda Nasradishi impaneled several months ago, as concerns over the global financial situation began to escalate. The committee was headed by Zeev Porat, the head of Enforcement and Collection at the Tax Authority.

Last week tax officials presented the recommendations to Bar-On and other top Finance Ministry officials, who applauded the concept.

In 2007 the Tax Authority bent toward small businesses by shifting 10,000 of them from a monthly VAT payment schedule to payment every two months.

Last week treasury officials convened to discuss the proposal, following a presentation by Tax Authority officials. Bar-On and Ram Belinkov, head of the budgets department, asked for clarifications, but treasury officials said that the minister is leaning toward accepting the recommendations.

In other VAT news, treasury officials are mulling another idea that would cost the state far more: lowering taxes on staples such as food and drugs. The cost to the budget would run about NIS 5 billion a year. The idea would also create a new animal in the Holy Land - differential VAT. Differential VAT systems may be the norm in a number of European countries, such as Belgium, France, Italy, Norway and Sweden - each in its own unique way. But here there's a flat rate of 15.5%.

Ahead of Israel's last Independence Day, the prime minister and finance minister tried to lower VAT to 15.0%. At the time the government was running a fat surplus, but the Tax Authority shot down the proposal anyway. The concept of differential VAT would be equivalent (from the perspective of budget management) to lowering VAT to 14.0%.

The Finance Ministry has yet to consult with the Tax Authority about its differential tax idea, even though one might say the taxman's opinion would be material.

Yesterday a top source at the Tax Authority expressed horror at the idea, noting that the main strength of Israel's tax collection system lies in its sheer simplicity. In fact, Israel's tax system has been applauded by economic elements around the world, including the International Monetary Fund, for that very quality. Introducing a differential tax system would birth an explosion of tax dodging and fraud attempts, the official warned. For that reason, East European countries joining the European Union opposed the attempt to bring them into the differential tax system employed elsewhere in the continent. They had enough problems and integration issues without it.