Why VAT exemption for foreign tourism harms the development of domestic travel
The Israeli Ministry of Finance considers it appropriate to abolish the VAT exemption for the tourism industry. It is planned to introduce amendments to the law that would return the tax collection from companies that provide tourist services to foreign citizens. Thus, hotels, car rentals, and medical facilities will be required to pay a fee for the country’s guests.
It should be noted that the Israeli government has been debating this issue for a long time. For many years, the Ministry of Finance insists on the need to revise the existing points of formation and payment of VAT. The main argument of officials is the fact that the system of a single tax for all is the most effective in the world. In addition, the Ministry noted that the existing exemption for the foreign tourism sector is not justified in terms of the amount of income received by the industry. At the same time, the exemption for some members of the industry discriminates against others. As a result, there is no incentive to develop the domestic tourism sector, and locals receive a lower level of service than foreigners.
Ministry of Finance arguments
So far, however, the government has been reluctant to change the law, arguing that the benefits have been in place in the country for a long time and have historical significance. In response, the ministry provides strong arguments that may persuade officials to take action:
- the 64% of foreign tourists who come to Tel Aviv and Jerusalem put additional strain on the cities’ transportation systems. In addition, the traffic difficulties here are quite large even without the influence of travelers, but their arrival often leads to serious traffic collapses;
- the influx of tourists stimulates the real estate market, resulting in skyrocketing prices for apartments and houses in the central parts of the cities. This situation makes it difficult for locals to rent or buy a home;
- massive foreign tourism leads to an increase in the number of vehicles, which in turn increases harmful emissions. In addition, the number of flights is increasing, which also has a negative impact on the environment and air quality in the country.
The authors of the amendments to the law believe that the abolition of the tax exemption will not have a significant impact on the development of the industry. However, such changes will be an excellent incentive for representatives of domestic tourism. More companies will appear on the market, which, in the sense of healthy competition, will help to lower the prices for travel within the country. In addition, it is important to understand that the foreign tourism sector cannot be systemically important for Israel because of the geopolitical situation in the region. The influx of travelers from other countries is extremely dependent on how safe it is to stay in the state at the moment.