Israeli VAT exemption for tourists to continue despite FM's objection

The proposed plan to add VAT to tourism services was canceled by a ministerial committee on Tuesday, following Tourism Minister Haim Katz's request.

"I thank the Prime Minister, the Finance Minister and my fellow ministers who supported my request to cancel the decree that dealt a heavy blow to the tourism industry. We will bring a proper budget to promote tourism in Israel, which is a significant growth engine," Katz commented.

Katz's opposition to the budget

Tourism Minister Katz had voiced his opposition after the state budget was approved, which included plans for the cancellation or reduction of the VAT exemption for tourists.

"I congratulate the Israeli government for approving the budget. We did not reach agreements regarding tourism and I intend to work to correct the injustices in the coming legislative process. I hope that common sense will prevail. Damaging tourism is damaging both the economy and Israel's image. The tourists are our ambassadors, tourism is an asset and we do not have the privilege to disparage it," Katz wrote then.

Tourists in Israel do not pay VAT on hotel stays or car rentals, but do have to pay VAT for other purchases. They can then receive a payback on the tax at Ben Gurion Airport before leaving the country.

According to estimates made during the budget debates, these paybacks amount to around NIS 700 million shekels per year. In 2022, the exemption was estimated at approximately NIS 660 million, according to Maariv.

Similar plans were advanced by Yair Lapid in 2013, when he was Finance Minister. The decision to eliminate the exemption on value added tax for tourists would lead to a 14 percent reduction in tourism, the country’s main tourism associations said at the time.

“We feel that the Finance Ministry made an incorrect decision,” said Michael Federman, chairman of the Israel Incoming Tour Operators Association, and of the Dan Hotels board, adding that making tourists pay an 18% tax would lead to an 8-14% drop in tourism, some 250,000 to 300,000 people. 

Eliav Breuer, Zachy Hennessey, Niv Elis and Ben Hartman contributed to this story.