VAT Payment Revolution: Tax to be Transferred at Point of Sale
The Tax Authority is promoting a smart system where businesses will transfer VAT to the state at the moment of payment, aiming to reduce bureaucracy and combat fictitious invoices. The move is expected to inject billions into public coffers. Meanwhile, the Treasury warns that VAT may rise to 19% in 2027.
The Tax Authority is promoting a revolutionary, large-scale reform of the VAT system in Israel, the first of its kind in decades. The reform is expected to fundamentally change the way hundreds of thousands of businesses account for and report their taxes. Instead of transferring VAT payments centrally on the 15th of each month, the funds will be transferred directly from the business to the Tax Authority's coffers at the moment payment for a transaction is received.
For example, when a refrigerator is purchased for 10,000 NIS plus 18% VAT, the 1,800 NIS tax amount will be transferred to the Tax Authority immediately. For installment purchases, the tax will be transferred proportionally with each payment. The reform's initiators, led by Tax Authority Director Shai Aharonovich, state that the program aims to reduce bureaucratic burdens, improve business cash flow, and strengthen the fight against the black economy.
The current model, established in 1976, requires businesses to report at the time of the transaction but transfer the tax only once or twice a month. This gap creates opportunities for fraud involving fictitious invoices. Despite the success of the "Israel Invoice" project launched in May 2024, criminals have adapted their methods, necessitating a deeper change in the collection model.
Under the new reform, all invoices will be transmitted in real-time from accounting systems directly to the Tax Authority. This will eliminate the need for businesses to finance VAT out-of-pocket before receiving customer payments. The Tax Authority estimates that "VAT Online" will mark a new era of digital, transparent tax collection. This year, the Authority expects to collect approximately 150 billion NIS in VAT, following 143 billion NIS in 2024 and 145.5 billion NIS in 2025.
"It will be a difficult budget year"
Meanwhile, there are growing estimates that the next government will be forced, due to a deep budget deficit, to discuss raising the VAT rate by one percent to 19%. A senior professional source at the Ministry of Finance stated that 2027 is shaping up to be a very difficult budget year.
"The demands of the security system and the need to reinforce civil budgets—such as education, health, and welfare, which were cut sharply during the war—will force us to raise taxes," the source noted. The Treasury emphasized that Israel's VAT rate is among the lowest in the world, four percent below the OECD average. Each additional percent of VAT would reduce the deficit by approximately 8 billion NIS. Bank of Israel Governor Prof. Amir Yaron has also recently indicated the necessity of raising taxes, with officials preferring indirect taxes like VAT over increasing the tax burden on the working public.
