Special Report ‘vat’ Spells New Burden for Israeli Tax-payers

Pretending they don’t face one of their worst economic crises ever behaving as if they can own the world, many Israelis are out on the streets again this week shopping. They buy whatever is in sight, giving inflation another boost. The reason for this latest buying spree is fear of a general price increase July 1, when the latest threat to the Israeli pocketbook, the value added tax, is introduced.

The value added tax is a relatively new invention of the international community of master-minds advising governments in their tax operations. At the present it exists in some 20 countries, among them members of the European Common Market and other European countries, countries in North Africa and Latin America. The institution of VAT in Common Market countries was one of the reasons for its introduction in Israel.

Although Israeli merchants and businessmen already complain that they are thoroughly confused by regulations regarding the new tax, it is actually quite simple. VAT is an indirect tax imposed on almost any expense, at each stage of the economic process–production, marking and consumption. Its exact rate is to be determined by the Finance Minister this week, probably between 8 and 10 percent.

HOW THE TAX WORKS

VAT got its name because it is imposed only on the value added between the price of production and the price of sale. The vendor does not transfer the entire tax deducted to the Treasury. He deducts the tax he himself had to pay when he bought the raw material to manufacture the article in question. Thus, it is eventually the customer who pays the entire tax. But the Treasury enjoys the intermediary payments.

For example, an importer buys wood for IL 100 which, assuming a 10 percent VAT, would carry a IL 10 tax. A carpenter purchases the wood for IL 150 and pays the importer an extra IL 15. Now the importer does not pass on the entire IL 15 to the Treasury but deducts the IL 10 he paid when he imported the wood and pays only IL 5 to the Treasury. This chain repeats itself at later stages, with each link receiving tax returns until the final product reaches the customer–who pays the entire tax.

Advocates of VAT say it is the best choice of all possible turnover taxes and they cite a number of arguments to support this claim. But it seems that the main advantage of the new tax is that it is expected to bring a lot of money into the money-hungry Treasury, Mordechai Bareket, Deputy Director General of Customs and Excise, who is in charge of operating the new tax, said in an interview with the Jewish Telegraphic Agency that on the basis of the 1975 annual State budget, each percentage of tax raised would mean IL 600 million for the government’s coffers. In other words, if the tax is set at 10 percent, it will account for an injection of IL 6 billion. But the net sum to be expected is some IL 2.5 billion which has been calculated in this year’s IL 85 billion, budget. The planned abolition of purchase and other indirect taxes accounts for the IL 3.5 billion difference.

Bareket does not expect an immediate price rise beyond 6-7 percent. Not everything must go up, he told JTA. Textiles, for example, now carry a 30 percent sales tax. If the sales tax is cancelled, of reduced, textiles will actually be cheaper. “But this,” he said. “also depends on the behavior of the public. A rush by the public to the stores will only make it easier for the store-keepers to raise their prices beyond the value added tax rate.”

EXPORT INCENTIVE

According to David Peled, Bareket’s predecessor. “In branches in which demand is flexible, it can be expected that a considerable part of the tax will be absorbed by the manufacturers, so that the price rise will only be partial.”

The new tax is intended to serve as an incentive for exporters, since exports are not taxable. The exporter is entitled to a return of the tax he paid in order to manufacture the exported goods. Moreover, he may enjoy the tax return long before he does the actual exporting. Imports are, of course, taxable, but there are several sorts of imports that are VAT-exempt: these include goods brought by new immigrants, tourists, temporary residents and diplomats; original works of art; and imports of diamonds and other precious stones. Bareket says there is no fear that the new tax might discourage potential investors because under the new system the foreign investor receives the full return of VAT input once he sells his product, just like the Israeli vendor.

PUBLIC COOPERATION NEEDED

Some 400 officials are currently working on the new tax, a heavy and complicated machinery designed to operate a tax that they insist is actually very simple. The new tax will go into effect in less than two weeks. Nobody dares predict that it will work. It is easier to be a pessimist than an optimist. There are some 150,000 assesses who until now have not kept account books and will have to do so and it will take a lot of effort to make them do it. Only 80 percent of them bothered to return the questionnaires the VAT authorities asked them to fill in before they open account books–an indication of the degree of cooperation that can be expected. “It will take at least a year until we get to those people and convince them to keep books.” said Bareket.

The tax has already been accepted by management and labor represented by the Manufacturers Association and Histadrut. Basic food products will be subsidized to neutralize the VAT. It is the man on the street–the one that will actually have to pay the money–who must learn to live with the new tax.