There are significant reforms relating to tariff reductions currently being considered for food products and other goods. Part of these reforms already came into effect, some are in planning stages and some have been published as draft for public review.

The cost of these reforms is estimated at approximately 1.5 billion ILS annually, and so the question must be asked – where is this money going to come from?

First of all, it’s important to put the matter in perspective: Israel’s income from customs is approximately 3 billion ILS annually (prior to the proposed decreases). This may seem like a large amount, but when compared to Israel’s overall income of approximately 380 billion ILS, the sum involved is less than 1% – small change. A 1.5 billion ILS reduction will have a minor impact.

Even so, the budget must be balanced. So where is the money coming from?

In March 2022, the economic reporter Bini Ashkenazi wrote an article titled “The Rich Entity is the State of Israel – with an All Time High Tax Income”. In the article itself he wrote that “Israel’s income in 2021 amounted to approximately 384 billion ILS. According to Israel’s Chief Economist’s report this is a real increase of approximately 22% from 2020 and 22% from 2019, prior to the Covid-19 crisis, with almost a third of the income as a result of VAT payments”. It is therefore clear that there is no problem in giving up on indirect tax amounting to 1.5 billion ILS annually. As we said, small change.

There is another possible explanation: the government recently introduced reforms that imposed purchase tax on sweet drinks and disposable plastic kitchenware as well as oils and solvents (excise and purchase tax). The annual income from these, according to Israel Tax Authority estimates, will be between 1.5-2 billion ILS, enough to cover the tariff reduction reform.

But there is no reason to stop there. The Covid-19s impact on international trade actually generated significant income for the State of Israel.

As is well known, maritime forwarding prices skyrocketed, and nowadays importing a 40 ft. crate from China to Israel costs around $15,000, as opposed to the previous $2,000-3,000 – an increase of 500-600% (!).

The Israel Tax authority also benefits from the price hike of maritime forwarding of crates. Why? Because forwarding costs are included in the valuation for import taxes – customs, purchase tax and VAT. The 17% VAT imposed on imported goods apply to the forwarding component as well. The burden of these costs – including import taxes – without doubt falls upon the consumer. Importers will obviously try and roll customs expenses on to consumers, but even in the case of goods that are only subject to import VAT – where VAT paid by the business sector will be offset – the full brunt of the VAT will still be rolled to the consumer, who cannot offset the VAT payments.

There is a legal solution for this situation. The Customs Order states that with regard to forwarding costs that were incurred due to unique circumstances beyond the control of the importer, the customs manager may decide not to include these costs in the transaction valuation. Therefore, the Tel Aviv Chamber of Commerce turned to the Customs Manager in December 2020, asking that he set a fixed forwarding price to be added the goods’ valuation. But the Israel Tax Authority refused to accept this request, even though to our understanding there is no major legal obstacle for exempting high forwarding costs from import tax valuation.

How much money is involved? Here is a crude calculation based on data found in the Central Bureau of Statistics website:

The number of crates unloaded in Haifa and Ashdod ports in 2020 was 934,000. If we only include crates forwarded from the far east, and more specifically – from China, the number is 168,000, as maritime trade with China was approximately 18% of all maritime trade in 2000. The difference of $12,000 for each crate between 2019 and following years, results in over $2 billion. Only the VAT  (17%), without purchase tax and customs, results in approximately $343 million, or over 1 billion ILS every year.

So here is another source to finance tariff reductions.

Don’t get us wrong – tariff reductions are of course a good and welcome move, especially if they succeed in reducing the cost of living. We merely wanted to put the matter in proper perspective.

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