Work on the 2025 budget is progressing well, although there is still time before it is approved by the Knesset. This time, budget preparation will be particularly complicated, because of the war, the fiscal deficit, and the measures that taxpayers will have to bear.
Specialists in the Ministry of Finance say in closed meetings that political sensitivities will make the task very difficult. The question facing Finance Minister Bezalel Smotrich's team and the Israel Tax Authority is how to close a gap of about NIS 70 billion in the 2025 budget if the fiscal deficit target of 3% of GDP still needs to be met.
The Israel Tax Authority has a drawer full of plans that have been proposed in the past and rejected. The government does not seem to have any new ideas that no one has thought of before to boost revenues by billions of shekels.
1. Fighting the black economy
The director of the Israeli Tax Authority, Shai Aharonovitch, announced that he will try to avoid increasing the burden on sectors of the population that already bear most of the burden. “We have to increase collection by expanding the tax base,” he said at the Eli Horvitz Conference on Economy and Society organized by the Israel Democracy Institute on Monday.
One way to combat tax fraud is the flagship program of former Tax Authority Director Eran Yaakov, “Israel Invoices,” which was launched only two and a half weeks ago. Under the program, all transactions worth more than NIS 25,000 must be reported to the IRS, which must approve the invoice. The goal is to eliminate bogus invoices, which cost the state millions in illegal tax deductions. Aharonovitch attaches great importance to this program, and claims that it is already showing results.
The Ministry of Finance and the Tax Authority estimate that the program will increase tax collections by about NIS 500 million annually, although since the black economy is by definition undocumented, an accurate estimate cannot be made.
In addition, Aharonovitch revealed that a new voluntary disclosure program will be launched, which will enable people to disclose hitherto unreported income without fear of criminal prosecution. The program is expected to bring in NIS 2-3 billion, but past experience with such programs suggests that people apply directly at the end of the amnesty period, so the hoped-for amount will only be achieved at the end of 2025.
2. VAT will rise, the question is when
In order to fill the public treasury quickly, the Ministry of Finance and the Tax Authority put forward other proposals, including the idea of moving forward the date of the scheduled increase in the value-added tax rate from 17% to 18% from January 2025 to June of this year. . The rise will bring billions that will start flowing from day one. The Globe understands that the Ministry of Finance is considering the possibility of another increase in VAT.
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3. Freeze income tax brackets: Net pay will decrease
Another Finance Ministry proposal contradicts Aharonovitch's statement that efforts will be made to avoid increasing the burden on those who bear the brunt of it. The idea is to freeze income tax brackets and the value of tax credit points in 2025. Tax brackets and the value of credit points are usually revised at the beginning of each year in accordance with the rise in the consumer price index. Credit score freezes will particularly affect large families.
4. Electric cars will cost more
Another step under consideration in the Ministry of Finance that was first reported by Globes is to cancel or postpone the plan to continue benefiting from the purchase tax on the purchase of an electric car from January 2025. According to the Ministry of Finance’s calculations, this will bring in 2.2 billion shekels in the years 2025. 2026. This means a jump in the purchase tax on electric cars from the current 35% to the full rate of 83%.
This would go against the global trend of encouraging the shift to more environmentally friendly vehicles through tax breaks, and therefore there are those in the government who oppose this idea. But of all the tax benefits at risk of being eliminated, politicians argue that eliminating this benefit is the least harmful to the public as a whole.
5. More tax collection on rentals?
One plan on the shelf that could bring billions into the public treasury and that the IRS would be happy to dust off is eliminating the tax exemption on residential rents of up to NIS 5,650 per month. This move has been tried more than once, but has always faced strong resistance from politicians.
The realization that this is a lost cause has prompted the tax authority to support its younger brother – eliminating the exemption from reporting income from rentals below the tax threshold. This would make it easier to create a database of owners who rent homes. This initiative has also been rejected by politicians in the past, but the chances of creating such a database are now higher due to the war and the need to fill state coffers.
6. The exemption on purchases from abroad will likely remain in place
Another initiative is to eliminate the VAT exemption on online purchases from overseas sites up to $75. According to a source in the Ministry of Finance, “Smotrich thought about presenting this plan, but the popularity of the exemption makes it difficult to move forward politically.” Since this is not the first time this proposal has been raised, and since it has disappeared in the past as quickly as it appeared, it is unlikely to become a source of additional income now.
7. Trapped profits
Another question being discussed behind the scenes is whether a “retained earnings release process 3” should be initiated. This could bring hundreds of millions of shekels. The previous process ended on November 15, 2022. It allowed companies to distribute accumulated profits as dividends at a reduced tax rate. Dividends worth NIS 35 billion were distributed, resulting in tax collections of NIS 2.9 billion, much more than expected. According to Finance Ministry sources, Smotrich supports such an initiative, but Budgets Division officials oppose it, arguing that it would represent “paying taxes at a competitive price.”
Published by Globes, Israel Business News – en.globes.co.il – on May 22, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.
