The Israeli Ministry of Finance has recently published a draft decree to increase the value-added tax (VAT) rate from 17% to 18%, effective January 1, 2025. The decision to raise VAT was made as part of a government plan to address the increase in state spending following the state of emergency and military operation that began in October 2023.

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The VAT increase is intended to help finance the additional budget needed to fund the war effort and the rehabilitation of the home front. The increase is expected to generate an additional NIS 7.2 billion in revenue for the state. However, if the economic situation improves, the Minister of Finance is considering canceling the increase next year.

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It is important to note that the tax increase was carried out under the Basic Law: The State Economy and the Fiscal Deficit Reduction Law, which require the government to meet deficit and government spending targets. The economic move indicates the government's attempt to balance between security and civilian needs while maintaining fiscal stability.

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In conclusion, the VAT increase to 18% in 2025 is a significant step with far-reaching economic implications. The increase will increase the state's revenues, but it will also place a burden on consumers and businesses. In the short term, the increase is expected to lead to an increase in inflation and a decrease in private consumption. In the long term, the impact of the increase on the Israeli economy will depend on a number of factors, including the growth rate of the economy, the level of inflation, and the monetary policy of the Bank of Israel.

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To view the draft decree, click here.

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