Israel Tax Authority Proposes Revenue Boosts Amid War Costs

Israel's Tax Authority is considering significant changes to tax collection and existing exemptions to increase state revenue, particularly in light of increased defense spending due to the ongoing war. Tax Authority Director Si Aharonovich discussed these potential measures at the Duns 100 forum, emphasizing the need to balance revenue generation with economic growth.

Aharonovich highlighted a proposed reform to shift Value Added Tax (VAT) collection to a cash-basis system, where VAT is remitted only after payment is received from the customer. He argued this would benefit small businesses and self-employed individuals who currently must pay VAT before receiving funds, while also reducing bureaucracy. He expressed surprise at the opposition to this "win-win" reform.

He also addressed the depletion of the Compensation Fund, which has paid out approximately NIS 20 billion since the war began. With the fund's reserves dwindling and purchase tax revenues fully allocated for 2024-2025, Aharonovich indicated that state budget funds will likely be needed next year to cover claims.

Regarding other potential revenue streams, Aharonovich suggested exploring the reintroduction of property taxes on land, a "travel tax" on all vehicles, taxes on sugary drinks and single-use items, and taxing returns on severance funds after they are released. He also proposed examining the VAT exemption in Eilat, suggesting a reporting requirement could generate NIS 1.5 billion, and reviewing the tax exemption on residential rental income, valued at NIS 4 billion annually. He stressed that while these are proposals for consideration, the final decisions rest with politicians.

Aharonovich also reassured the high-tech industry, calling it a vital "engine" for Israel's economy and stating the Tax Authority supports it. He set a goal for 2027 to restore the balance of companies registered in Israel, acknowledging a current crisis in this area.

Shilo Zabrowsky Weiss of Duns 100 noted the challenge of balancing revenue needs with economic growth, observing a shift in the Tax Authority's approach towards collection mechanisms and enforcement, exemplified by the "trapped profits" reform. She also pointed to artificial intelligence as a factor that will significantly alter tax collection and enforcement capabilities.