Treasury plans canceling VAT exemption on online imports

Parcel sorting for online overseas purchases / Photo: Michal Raz Chaimovitz

The cancellation of the exemption on imports up to $75 would ease the budget deficit and help retailers and shopping malls, but would hit consumers hard.

The Ministry of Finance is spearheading elimination of the VAT exemption on personal imports of products. Sources inform "Globes" that the proposal to cancel the exemption on imports of products up to $75 will be part of a package of measures in the proposed 2020 state budget to provide NIS 20 billion missing in the budget. The measures will be presented to the minister of finance appointed in the next government.

The Ministry of Finance plans to bring the budget for cabinet approval in December, and to complete approval of the budget bill by the Knesset by March. Assuming that the cabinet and the Knesset approve the proposal, based on the planned timetable, elimination of the exemption will become effective around April.

The volume of purchases exempt from VAT was most recent increased in early 2012 in response to the social protest against the cost of living in the summer of 2011. As of now, a delivery containing products with an aggregate value of up to $75 is completely exempt from VAT and customs duties. There are nevertheless a number of exceptions. The exemption does not apply to tobacco and alcohol, and does not include packages sent from the same supplier to the same customer at intervals of less than 72 hours.

The significance of canceling the VAT exemption for the budget will only grow in the coming years. The volume of VAT-exempt imported products is currently estimated at NIS 3 billion a year, and the market is rapidly growing. In recent years, the volume of goods purchased online from abroad by Israelis has increased by 20% a year annually in recent years.

This means that eliminating the VAT exemption will generate NIS 600-700 million in tax revenue, starting in 2020. At the same time, it is difficult to predict how canceling the exemption will affect the volume of imports, and it is likely that the rate of increase will slow substantially after the tax is imposed, at least in the short term. Beyond the revenue likely to result, it should be noted that the Ministry of Finance prefers raising taxes that do not detract from growth, and canceling the VAT tax exemption is not perceived as a measure that could decrease the economic growth rate - a reduction in imports should increase GDP.

The success of the measure obviously depends on obtaining political support. Minister of Finance Moshe Kahlon has already prevented the Ministry of Finance from going ahead with canceling the exemption, but circumstances now are very different, making this measure far more likely. In the budget for 2019, an election year, Kahlon opposed any tax increase, fearing that electoral damage would result. This time, it appears that the government will have no alternative to raising taxes, as Governor of the Bank of Israel Prof. Amir Yaron has made clear.

"The Ministry of Finance has made no preparations, and the senior professional staff will make no preparations, on the subject of the 2020 budget before a new government is formed," Ministry of Finance director general Shai Babad said. "The entire system is waiting for the appointment of a new government and a new minister of finance to set a policy from which the professional staff can devise a work plan. A plan relying on internal work in one of the departments has no binding significance."

Ministry of Finance wants to exploit the political opportunity

Eliminating the VAT exemption on personal imports is a measure that will be relatively easy for the government to pass, because an entire sector supports it. Local manufacturers, who argue that the exemption discriminates against them and in favor of foreign products, have been campaigning for cancellation of the exemption for a long time. Federation of Israeli Chambers of Commerce president Uriel Lynn, who has declared more than once that it was a crucially important measure, was behind the earlier attempt to eliminate the exemption, and spearheaded a petition to the High Court of Justice in the matter.

For this reason, it appears that this time, the measure is politically feasible, which means that for the Ministry of Finance, it is an opportunity not to be missed. Another consideration is the timing. It will probably be easier for the government to push through less popular measures in its first year without losing votes in the next election.

If the exemption is canceled, it will be a severe blow to the Israeli consumer and positive news for fashion retailers and shopping mall companies. Up until now, the public in Israeli has taken full advantage of the option of VAT-exempt purchasing. The retailers have had difficulty competing with online shipping and have lost customers and had to grant deep bargains and discounts.

According to figures from the statista database, the ecommerce market in Israel which was estimated at NIS 13 billion in 2018, is projected to growth to NIS 20 billion in 2023. The Israel Postal Company estimates that 70 million packages ordered from overseas will be delivered by the end of 2019. Ecommerce is estimated at NIS 2.3 billion in the fashion sector alone, according to the Czamanski & Ben Shahar consultant firm.

Published by Globes, Israel business news - en.globes.co.il - on September 15, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Parcel sorting for online overseas purchases / Photo: Michal Raz Chaimovitz
Parcel sorting for online overseas purchases / Photo: Michal Raz Chaimovitz
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