Government approves 1% cut to VAT

New 15.5% rate to take effect July 1 at estimated cost of NIS 3.3b.

hirchson 298.88 (photo credit: Ariel Jerozolimski [file])
hirchson 298.88
(photo credit: Ariel Jerozolimski [file])
The government approved on Sunday a one percent reduction to the VAT, to take effect July 1. The new VAT rate will stand at 15.5% and will cost the government approximately NIS 3.3 billion in tax revenues per year. Economists, the business commmunity and regular Israelis welcomed reports over the weekend that Finance Minister Avraham Hirchson would announce a reduction in value-added tax to between 15 and 15.5 percent when he presented his overall economic plan for 2007 at the Israel Democracy Institute's 14th Annual Caesarea Forum in Jerusalem this week. "Reducing VAT will increase consumption and stimulate economic growth," said Robi Nathanson, chairman of the Macro-Center for Political Economics. "The move is particularly positive for lower income groups who stand to make proportionally higher savings on the cuts." In 2005, the Knesset passed a NIS 11 billion tax-reform program whereby VAT was cut from 17% to 16.5%, effective at the beginning of September. Nathanson was not concerned that the additional cuts would be detrimental to the country's current account balance. "Each percentage change has a value of NIS 1.5 billion but we currently have a healthy flow of income from taxes," he said. "We collected around NIS 8b. in the first quarter which was higher than expected, and the budget surplus allows us to afford the decrease." He added that the only negative that could come from the move would be if there was an increase in the budget deficit, such as in Europe where the trend has been to increase VAT levels. "However, this is not the case in Israel," he noted. Hirchson was expected to present his economic plan for 2007 for the first time giving particular attention to reducing social gaps prevalent in the economy.