Treasury: VAT cut not fully passed on to consumers

supermarket  picture: thinkstock

The VAT cut in Israel last October was aimed at lowering consumer prices and increasing consumption.

Hopes that lowering VAT would result in lower prices and boost consumption have been confounded. A senior Ministry of Finance source told "Globes" that the drop in VAT from 18% to 17% at the beginning of October 2015 had been passed on to the consumers only partially.

The source stated, "We cut VAT by 1%, but half of the businesses added it to their profits, rather than passing it on to the consumer. The retail chains also failed to give the consumers the full difference. That's very serious." These findings emerged from an initial probe by the Ministry of Finance of the effects of the VAT cut.

Prime Minister Benjamin Netanyahu and Minister of Finance Moshe Kahlon announced a 1% cut in VAT, which went into effect on October 1, 2015. The measure, which was facilitated by surplus tax revenues, was designed to encourage private consumption.

It was assumed that lower VAT would mean lower prices, thereby increasing consumption. The Bank of Israel opposed the measure at the time, saying, "Measures for helping export sectors and investment are preferable to additional support for private consumption."

The VAT cut resulted in price cuts of hundreds of shekels for large products, such as cars: for example, the price of a car priced at NIS 100,000 fell by NIS 847, and the price of a refrigerator priced at NIS 8,500 fell by NIS 72.

Where food products are concerned, however, the price cut would have been at a fraction of a shekel per product. The VAT reduction should have saved NIS 25 for a family whose monthly consumption basket is NIS 3,000 a month. The general benefit was expected to extend to all of a family's expenses, including current accounts, and should have reached more substantial sums.

The fact that the VAT cut amounted to only a fraction of a shekel made it easy for the retail chains to avoid passing the cut on to the consumer, because the consumer was unable to tell the difference.

A check conducted by "Globes" in cooperation with the Prices website shows that the VAT cut was in point of fact not passed on to the consumer in most cases; the retail chains used it to increase their profits. The branches and products checked were selected randomly.

For example, the price of Sugat Persian rice did not fall at branches checked in Victory Supermarket Chain Ltd./ (TASE: VCTR), Yesh in the Neighborhood, Yesh Chesed, and Alonit. On the other hand, the price at Shufersal Express and Yochananof went down. At Rami Levy Chain Stores Hashikma Marketing 2006 Ltd. (TASE:RMLI), the price of cheese bourekas made by Maadanot and Bissli Grill did not fall following the VAT cut.

Published by Globes [online], Israel business news - www.globes-online.com - on April 5, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

supermarket  picture: thinkstock
supermarket picture: thinkstock
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