Closing the fiscal gap: Higher VAT, lower net pay

Minister of Finance Bezalel Smotrich credit: Noam Moskovich Knesset Spokesperson
Minister of Finance Bezalel Smotrich credit: Noam Moskovich Knesset Spokesperson

"Globes" sets out the measures under consideration in the 2025 state budget for bringing in more tax revenue.

Work on the 2025 budget is moving into high gear, even though there is plenty of time before it needs to be passed by the Knesset. This time round, preparing the budget will be especially complicated, because of the war, the fiscal shortfall, and the measures that taxpayers will have to bear.

In closed meetings, the professionals at the Ministry of Finance say that political sensitivities will make the task extremely difficult. The question that Minister of Finance Bezalel Smotrich's team and the Israel Tax Authority face is how to close a gap of some NIS 70 billion in the 2025 budget if a fiscal deficit target of 3% of GDP is still to be met.

The Israel Tax Authority has a drawer full of plans that were proposed in the past and rejected. It does not look as though the government has any new ideas that no-one has thought of before for boosting revenues by billions of shekels.

1. Battling the black economy

Israel Tax Authority director Shay Aharonovich has declared that he will attempt to avoid increasing the burden on the sections of the population that already bear most of it. "We have to increase collection by expanding the tax base," he said at the Israel Democracy Institute’s Eli Hurvitz Conference on Economy and Society on Monday.

One of the ways of combatting tax cheats is the flagship program of the previous Tax Authority director Eran Yaacov, the "Israel Invoices" program, which has been in operation for just two and a half weeks. Under the program, all transactions over NIS 25,000 must be reported to the Tax Authority, which must authorize the invoice, the aim being to eliminate fictitious invoices, which cost the state millions in illegitimate tax deductions. Aharonovich sets great store by this program, and claims that it is already showing results.

The Ministry of Finance and the Tax Authority estimate that the program will raise tax collection by some NIS 500 million annually, although since the black economy is by definition undocumented, no precise estimate can be made.

In addition, Aharonovich revealed that a new voluntary disclosure program will be launched, enabling people to disclose hitherto unreported income without fear of criminal prosecution. The program is expected to bring in NIS 2-3 billion, but past experience with such programs is that people come forward right at the end of the amnesty period, so the hoped-for sum will materialize only at the end of 2025.

2. VAT will rise, the question is when

In order to fill the public coffers quickly, the Ministry of Finance and the Tax Authority have raised other proposals, among them the idea of bringing forward the planned rise in the rate of VAT from 17% to 18% from January 2025 to June this year. The rise will bring in billions that will start to flow from day one. "Globes" understands that the Ministry of Finance is even examining the possibility of a further rise in VAT.

3. Freezing income tax brackets: net pay will fall

Another proposal of the Ministry of Finance contradicts Aharonovich’s statement that efforts will be made to avoid increasing the burden on those who already bear most of it. The idea is to freeze the income tax brackets and the value of tax credit points in 2025. Usually, tax brackets and the value of credit points are revised at the beginning of each year in accordance with the rise in the Consumer Price index. Freezing credit points will particularly affect large families.

4. Electric cars will cost more

Another move under consideration at the Ministry of Finance that was first reported by "Globes" is to cancel or postpone the plan for a continued purchase tax benefit on the purchase of an electric vehicle from January 2025. According to the Ministry of Finance’s calculations, this would bring in NIS 2.2 billion in 2025-2026. It would mean a jump in purchase tax on electric vehicles from the current 35% to the full rate of 83%.

This would go against the global trend of encouraging a switch to more environmentally friendly vehicles through tax breaks, and there are therefore those in the government who oppose the idea. Of all the tax benefits in danger of being abolished, however, politicians consider abolition of this one to be the least damaging to the public as a whole.

5. More tax collection on rents?

One plan on the shelf that could bring in billions to the public purse and that the Tax Authority would be happy to dust down is abolition of the tax exemption for residential rents of up to NIS 5,650 monthly. The move has been tried more than once but has always met stiff resistance from the politicians.

The understanding that this is a lost cause has led the Tax Authority to support its little brother - abolition of the exemption from reporting income from rents below the tax threshold. This would facilitate the creation of a database of owners who rent out homes. This initiative too has been rejected by the politicians in the past, but the chances of setting up such a database are now higher because of the war and the need to fill the state’s coffers.

6. Exemption on overseas purchases will probably remain

Another initiative is the abolition of the exemption from VAT on online purchases from overseas websites up to $75. According to a Ministry of Finance source, "Smotrich thought of raising this plan, but the popularity of the exemption makes it politically hard to advance." Since this is not the first time that the proposal has been raised, and since in the past it has disappeared as quickly as it appeared, it is unlikely to become a source of extra revenue now.

7. Trapped earnings

Another question being discussed behind the scenes is whether to embark on "trapped earnings release operation 3." This could bring in hundreds of millions of shekels. The previous operation ended on November 15, 2022. It allowed companies to distribute accumulated earnings as a dividend at a reduced rate of tax. Dividends totaling NIS 35 billion were distributed, resulting in the collection of NIS 2.9 billion in tax, which was much more than was forecast. According to Ministry of Finance sources, Smotrich is in favor of such an initiative, but Budgets Division officials oppose it, arguing that it would represent "bringing taxation forward at a bargain price."

Published by Globes, Israel business news - - on May 22, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Minister of Finance Bezalel Smotrich credit: Noam Moskovich Knesset Spokesperson
Minister of Finance Bezalel Smotrich credit: Noam Moskovich Knesset Spokesperson
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018