18 December, 2022
The Israeli government is flooding the market with a variety of reforms recently. In this article we will discuss a few Finance Ministry reforms relating to indirect tax.
A. Imposing a purchase tax on disposable plastic kitchenware: this is a completely new initiative by which the Finance Ministry aims to reduce the use of disposable plastic kitchenware. The purchase tax will amount to 11 ILS per kilogram, and apply to disposable plastic kitchenware of up to a certain thickness (beyond this limit, the plastic kitchenware will not be considered disposable).
According to the Finance Ministry, approximately 90% of the pollution in Israel’s beaches is due to plastic waste, with disposable plastic kitchenware amounting to 19% of waste in Israel’s public areas. The Finance Ministry further claims that the use of disposable plastic kitchenware is a serious threat to ecological systems and public health, as micro-plastic particles spread in the water, the ground and the air. The Finance Ministry explained that consumption rate of disposable plastic kitchenware by households in Israel unusually high compared to other countries, and is spread across all socioeconomic sectors. For example, while EU household consumption of disposable plastic kitchenware is estimated at approximately 1.5 kilograms per capita every year, in Israel the rate is 5 times higher at approximately 7.5 kilograms per capita.
The aim of the tax is to reduce consumption of disposable plastic kitchenware and promote use of reusable kitchenware. The Finance Ministry views this tax to be in line with the principle of “the polluter pays”, so those who chose to consume disposable plastic kitchenware at a higher rate will pay a more significant price for ecological damages.
The Finance Ministry estimates an additional income of approximately 60 million ILS annually due to this tax.
B. Imposing a purchase tax on sweetened drinks: this is also a completely new initiative (after a similar tax was annulled in the 80s), which involves imposing a purchase tax on sweet drinks with high sugar levels and drinks containing artificial sweeteners. Under the proposed tax, purchase tax will be imposed on sweet drinks, fruit juices and concentrates in a differential manner, according to the sugar rates in each drink.
According to the Finance Ministry, there is a global worrisome trend of obesity which has not skipped Israeli citizens and children, with obesity derived mainly from problematic nutrition habits, including a high consumption rate of sugar, sweeteners and other harmful components. The Finance Ministry claims that epidemiological studies found that consumption of sugar in its liquid form results in a higher risk of developing a metabolic syndrome than consumption of sugar in its solid form. Other studies, that researched artificial and natural sweeteners, found that consumption of the sweeteners bypasses the body’s natural metabolic processes, impacting satiation and food consumption levels. The Finance Ministry also noted that in recent years many countries are dealing with the problem of obesity through taxation of harmful foods, particularly sweet drinks. Among these countries are Finland, Denmark, Mexico, Hungary, France and others.
The Finance Ministry estimates an additional income of approximately 380 million ILS annually due to this tax.
The criticism over these two reforms is expected to increase as they take form and come into effect, and it may be assumed to be focused on a few main points:
On a general level – is there justification for targeted taxation of a certain product, thus breaching the mostly uniform indirect taxation framework? Currently, there is a transverse indirect tax (VAT), while purchase tax is imposed on selected sectors – cars, tobacco and alcohol. Is it right to create additional “tax islands”?
On an individual level – is imposing a tax the correct tool for reducing consumption? A recent regulatory reform imposed the obligation of marking products with high levels of sugar, fat or sodium with eye catching red stickers in order to warn consumers – wouldn’t it be better to wait and see the results of that reform? Aren’t there other alternatives? And what about products that were not taxed – will there be holes in the tax system? And how about the inflow of products from the Palestinian Authority, which remains unclear regarding the implementation of the reform?
In short, these reforms are the source of many questions.
C. Excise duty reform on oils and solvents: in this case it is not a completely new reform, but a renewed attempt to advance a reform that was halted due to Israel parliamentary crisis.
According to the Finance Ministry, there is a sharp increase in import and production of oils and solvents, which in practice serve as a substitute to diesel or to dilute diesel and gasoline, including for use as car fuel. The Finance Ministry claims that this phenomenon is harmful in several respects, including damaging state income, damaging cars using such fuel and increasing pollution, and poses a sever threat to public health and safety.
The Finance Ministry therefore seeks to impose excise and purchase tax similar to the excise rate on diesel on fuel substitutes, meaning solvents and other materials that may serve for fueling vehicles or as combustibles. And what about the various industries that use these fuel substitutes as raw materials in their production process (such as colors, fertilizers etc.)? The Finance Ministry suggests an exemption for industrial factories in various sectors. The exemption on fuel substitutes for industry will be limited to use that is not for producing energy, cleaning or oiling, and will be granted on the condition that the final product for which the exemption was requested is not itself fuel or fuel substitute subject to excise or purchase tax.
The Finance Ministry estimates an additional income of over 500 million ILS annually due to this tax (and other amendments to excise tax).
For the purpose of transparency, it should be noted that Goldfarb Seligman advises various companies and entities that may be impacted by the aforementioned tax reforms.
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