Israel's Tax Authority Launches Real-Time VAT Payment Reform to Combat Fraud and Improve Cash Flow

Israel's Tax Authority is implementing a groundbreaking reform to the Value Added Tax (VAT) system, the first major change in decades. The reform will shift VAT payments from a monthly lump sum due on the 15th of each month to immediate transfers to the tax authority at the time of each transaction. For example, if a customer buys a refrigerator for 10,000 shekels plus 18% VAT, the 1,800 shekels VAT will be paid instantly rather than weeks later. If the purchase is made in installments, VAT payments will be split accordingly.

Led by Tax Authority Director Shai Aharonovitch, the reform aims to reduce bureaucratic burdens, improve business cash flow, enhance tax collection efficiency, and fight black market activity and fake invoices. The current VAT system, established in 1976, requires businesses to report and pay VAT monthly or bi-monthly, often before receiving payment from customers, creating opportunities for fraud. Despite advances like the "Israeli Invoice" project launched in May 2024, fake invoices remain a problem, partly due to criminals splitting transactions below reporting thresholds.

Under the new system, invoices will be transmitted automatically and in real time from business accounting systems directly to the Tax Authority, eliminating manual paperwork. VAT will be collected digitally at the moment of payment, easing financial strain on small and medium enterprises. This "online VAT" model is expected to usher in a simpler, more transparent tax collection era, significantly reducing the shadow economy.

The VAT revenue is a major source of government funding, with collections expected to reach about 150 billion shekels in 2026, up from 143 billion in 2024. Meanwhile, economic forecasts suggest the next government may need to raise the VAT rate from 18% to 19% to address a deepening budget deficit. A senior Treasury official noted that Israel's VAT rate is low compared to OECD averages and that increasing it by one percent could reduce the deficit by roughly 8 billion shekels annually. Bank of Israel Governor Amir Yaron has also indicated a preference for raising indirect taxes like VAT over increasing taxes on labor.