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Israeli Budget Includes Controversial VAT Plans

By Lorys Charalambous,, Cyprus

01 October 2014

Israel's Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid both refused to budge an inch in finalizing the 2015 budget on September 28, after weeks of closed debate.

In the portion of the budget Netanyahu sought to secure, the deal that has emerged includes ILS7-8bn (USD1.9-2.17bn) in spending on defense this year, and a further ILS6bn next year. Meanwhile, Lapid secured a commitment that taxes will not rise and was allowed to proceed with his plans to apply a zero rate of value-added tax on the first purchase of housing by certain categories of taxpayers, despite warnings from the Central Bank against the policy.

As a result of the Budget, hailed by Lapid as one of "hope and promise," the deficit will drift from this year to about 3.4 percent of gross domestic product (GDP).

The value-added tax proposal will involve the offering of a zero rate on property sales to first-time buyers up to a value of ILS1.6m (USD460,000), instead of the current 18 percent rate on sales.

The concession is to be offered to couples with at least one child, or persons over the age of 35, for whom the property is their first purchase. However, other conditions attached to the tax relief have drawn criticism. Tax relief will be open only to persons who have served in the army or who have completed National Service.

The proposal was earlier approved by Israel's Parliament, the Knesset, with 31 lawmakers in favor and 18 against. However, ahead of the Knesset vote, Knesset legal adviser Eyal Yinon warned that the discriminatory treatment of certain categories of taxpayers would, if challenged, be found to be illegal.

Meanwhile the Governor of the Bank of Israel, Karnit Flug, warned that the measure would be damaging and stoke rising house prices rather than make housing more affordable. She pointed out that the problem is a lack of supply, which will be exacerbated by the temporary rise in demand generated by the measure.

TAGS: Finance | VAT rates | tax | value added tax (VAT) | law | gross domestic product (GDP) | budget | Israel | Tax

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