The government decided on Wednesday to raise the value added tax by 1 percent to 17%, a move that is expected to result in price hikes for various commodities and services. The measure is scheduled to take effect on Sept. 1. Utilities such as the electric and water companies, tourist industry venues, the food product industry and manufacturers of other consumer goods are expected to raise their rates and prices in light of the increased VAT. Only fruits and vegetables, and goods sold in the VAT-free city of Eilat, will be unaffected by the measure. In especially competitive industries, such as clothing and footwear businesses, which are granted special tax breaks during specific seasons, the VAT hike will not be felt as much as in other industries. On the other hand, the housing sector will see a sharp rise in payments made by those who purchase new apartments. Any payment made to contractors or apartment owners until Friday night will not need to be linked to the 1% increase in VAT. Payments beyond that point will have to be adjusted to the VAT hike. Due to the pending VAT increase, financial experts say that in certain cases it is advisable to renegotiate the terms of the real-estate purchase, depending on the type of contract signed and the urgency of the owner or contractor to complete the deal. Financial experts who oppose the measure describe it as a regressive tax. They say the tax will be applied in a relative manner to products, will be difficult to avoid and will constitute a large and gradually increasing portion of people's income down the scale of income tax brackets. The measure will be unlike progressive taxes, such as the income tax, which rise proportionally as incomes increase. In other words, people in lower income brackets will pay the same rate of VAT as people in higher income brackets, and for them, it will mean a larger portion of their monthly expenditures. In July, Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz said they were considering introducing new budget cuts and tax hikes to fund this year's budget shortfall, on top of austerity measures that were already expected to be included in next year's budget. If this year's budget amendments are approved, an expected 2.7 billion shekels ($600 million) would be added to the state treasury. Finance Ministry officials support the VAT tax hike due to the fact that VAT is considered a fee that is easy to collect. According to the officials, new taxes, such as a tax on inheritances, would require the establishment of a more complex collection system. In recent weeks, ministry officials claimed they have already used up most of their means of tax collection from people in the upper income brackets. Other supporters of the VAT increase say it can help eliminate the black market in the country because those who consistently refuse to pay taxes through different methods, are forced to pay VAT when they buy groceries. Guy Reshtick, of the Chicago-based Baker Tilly accounting and advisory firm, said on Wednesday that to avoid paying the additional 1% in VAT, people should purchase their products and goods before the measure takes effect. On the purchase of vehicles, Reshtick says, the amount due will depend on when the vehicle is delivered. "The extra 1% may in some cases result in thousands and tens of thousands of shekels. But it is important to understand that when it comes to vehicles, the delivery date is what counts. If I walk into a car sale agency and order a new vehicle and agree to pay the price in advance to avoid paying the extra 1% in VAT, I will still need to pay the extra 1%. The amount is determined by the date upon which I take physical possession of the vehicle," Reshtick said. Reshtick also warned: "It is very important that people do not compromise on the type of vehicle they want to purchase, thinking they will beat the extra VAT percent, unless the importer says explicitly in advance that he or she will cover the extra percent and approves the reduction in the overall price."
