The Netanyahu government is planning to cancel the VAT exemption for foreign visitors on tourism services as part of its upcoming state budget.
At present, tourists enjoy a waiver from the 17-percent tax on services in the sector, spanning from hotels to car rentals.
The opponents of the policy hope to remove it from the official plan before the state budget proposal for 2023-2024 ahead of the first vote, which is slated for March 23.
The proposal by the Ministry of Finance to cancel the exemption is based on the argument that it is ineffective and creates “a subsidy for foreign tourism at the expense of domestic tourism.” It estimates the loss of income due to the exemption at 2 billion shekels (over $500 million) per year.
The exemption is currently applied to services including hotel accommodation, car rentals and services related to medical tourism.
Tourism organizations and hoteliers believe – and fear – that canceling the exemption will harm their ability to bring travellers to Israel and will lead to a decrease in tourism revenues.
The industry’s top executives, together with lobbyists and strategists are fully engaged in an effort to pressure politicians to abandon the idea.
Hotel executives have written to Finance Minister Bezalel Smotrich, and held meetings with Tourism Minister Haim Katz along with Justice Minister Yariv Levin who served as Tourism Minister between 2015 and 2020.
Industry leaders believe that Levin, who has fought for Israeli tourism in the past, will do so again, despite the fact that he is currently preoccupied with matters related to the judicial revolution.
There have been previous attempts to cancel the VAT exemption, in 2009 and in 2013 – both times, the Finance Ministry caved to pressure from the tourism industry.
They contend that the exemption will significantly increase the price of travel to Israel from abroad, depressing tourism at a time when the industry is still trying to recover from the COVID pandemic.
In 2022, 41 percent fewer foreign tourists visited Israel than in 2019, meaning that income from inbound tourism fell to 13.5 billion shekels in 2019 from a high of 23 billion shekels.
The Finance Ministry has argued that the tourism industry is already supported by the government through budget directed to building hotels and tourism infrastructure and marketing of Israel abroad as a tourist destination.
The ministry contends that the extent of exemptions given in Israel is not common in the rest of the world. Goods purchased in a country are given a VAT exemption in many countries.
But the ministry claims that the same is not true for tourism-related services, saying that they only enjoy exemptions in two countries – Israel and Chile – justifying their desire to cancel it.
Tags: Bezalel Smotrich, VAT exemption, hospitality industry, Israeli tourism
