Finance Committee of the Knesset has approved an increase in Israel's Value Added Tax

In a move to address the significant deficit in the state budget, the Finance Committee of the Knesset has approved an increase in Israel's Value Added Tax (VAT) rate from 17% to 18%, effective January 1, 2025. This decision marks the first adjustment to the VAT rate since 2015 when it was reduced from 18% to 17% under the initiative of the then Minister of Finance, Moshe Kahlon, aimed at stimulating economic activity and growth.

The decision, made despite Prime Ministerial assurances just two months prior that there would be no tax hikes, is anticipated to generate an additional income of NIS 7.2 billion. However, concerns have been raised regarding the potential impact on household finances, particularly amidst ongoing economic challenges exacerbated by recent conflicts.

Critics within the Knesset, including members from the coalition, have voiced opposition to the VAT increase, citing its potential adverse effects on already strained households. MK Hanoch Malvitziki questioned the prioritization of taxation over other budgetary considerations, highlighting issues such as state-funded pensions and military expenditures. Similarly, MK Hamed Amar expressed concern over the burden on vulnerable segments of society, particularly in terms of increased costs for essential goods like medicine.

Uriel Lin, president of the Union of Chambers of Commerce, also criticized the decision, emphasizing the current economic crisis and the potential negative repercussions on private consumption. Lin highlighted the likelihood of price increases across various sectors, including utilities, healthcare, and housing, further impacting the financial well-being of citizens.

Despite opposition, the Finance Committee, chaired by MK Moshe Gafni, ratified the government's proposal, aligning with the balancing plan for 2024. The impending VAT adjustment underscores ongoing efforts to address fiscal challenges and stabilize the state budget, albeit amidst dissent and concerns regarding its socioeconomic ramifications.

The VAT increase will see transactions and imports in Israel subject to an 18% tax rate, with exemptions for certain goods and services remaining intact for the time being. As the decision moves forward for final approval, it sparks debate over the balance between fiscal responsibility and the welfare of Israeli citizens, particularly those most vulnerable to economic shocks.