Israel Tax Authority Proposes Digital VAT Reform to Combat Fraud and Ease Business Cash Flow

The Israeli Tax Authority is advancing a comprehensive reform to overhaul how businesses report and pay Value Added Tax (VAT). Currently, businesses must collect physical invoices, manually file reports, and calculate VAT periodically. Under the proposed system, all invoices generated via accounting software or cash registers will be transmitted instantly and digitally to the Tax Authority. This will enable automatic aggregation and summarization of transactions into a digital account statement for each business, eliminating the need for manual paperwork.

A key change is shifting VAT payment from the invoice issuance date to the actual receipt of payment, effectively moving to a cash-based VAT system. This aims to ease cash flow for businesses by aligning tax payments with real income, replacing the current "net plus" system where tax is due upon invoicing even if payment is delayed. The reform also targets the widespread issue of fictitious invoices, which currently cause an estimated annual VAT revenue loss of about 15 billion shekels. The new model requires buyers to pay suppliers only the net price, while the VAT portion (18%) is paid directly and electronically to the Tax Authority. Upon payment, the Tax Authority issues a digital payment approval number used to generate a legal tax invoice.

This separation of VAT payments prevents suppliers from collecting VAT from buyers without remitting it to the state, closing a major loophole exploited by criminals issuing fake invoices. The existing VAT law dates back to the 1970s and relies on retrospective reporting, which enables fraud through timing gaps and shell companies. Previous reforms, such as the "Israeli Invoice" system requiring approval numbers for invoices over 5,000 shekels, were circumvented by splitting transactions into smaller amounts.

The Tax Authority’s analysis found that in 2025 alone, transactions worth 12.2 to 16.4 billion shekels were shifted below reporting thresholds, creating a "black hole" of untraceable activity and causing an additional VAT revenue loss of 2.2 to 3 billion shekels. The reform also aims to replace manual audits and delayed enforcement with continuous, automated daily VAT reconciliation, speeding up refunds and improving compliance.

Implementation depends on passing appropriate legislation, and no start date has been set. VAT is a critical revenue source for Israel, accounting for 143.3 billion shekels in 2024 (about 30.2% of government tax income), with projected collections rising to 167.2 billion shekels by 2026. The new system is expected to strengthen tax enforcement, reduce fraud, and improve business liquidity.