Israeli Cabinet Committee to Debate VAT Cut Despite Finance Ministry Opposition

The Israeli Ministerial Committee for Legislation is set to discuss a bill proposed by Yechiut Torah chairman Yitzhak Goldknopf to immediately reduce the VAT rate from 18% to 17%. This initiative is advancing amid preparations for upcoming elections and is expected to be approved by the Knesset before the vote, despite strong opposition from the Finance Ministry and the Tax Authority. According to recent calculations by the Tax Authority, the proposed VAT cut would result in an annual revenue loss exceeding 8.5 billion shekels for the state budget. Finance Ministry officials warn that if the bill passes, the government will need to find alternative budget sources or cut public services. A ministry source described the proposal as a "populist move before elections with no real economic justification," emphasizing the need for targeted measures to combat the high cost of living rather than creating a budget deficit.

Supporters of the bill, including welfare organizations and economic groups, argue that lowering VAT will broadly reduce prices and ease the burden on consumers. However, past experience shows that VAT reductions do not always fully benefit consumers, as some sellers absorb the difference as additional profit. Ahead of the committee discussion, Shahar Turgeman, president of the Federation of Israeli Chambers of Commerce, sent an urgent letter urging committee members to back the bill. He stated that the VAT cut is the most appropriate step to stimulate business activity, particularly benefiting small and medium-sized enterprises, which constitute about 90% of commerce and service businesses according to Central Bureau of Statistics data. The VAT was raised to 18% in January 2025 to address the deficit caused by Operation Iron Swords.