VAT on Imports — A Complete Guide for Businesses

If you are a business owner importing goods from abroad — whether you're a small freelancer importing parts for your portfolio or a large company importing full shipments — you have a reporting obligation to the tax authority. VAT on imports is not as straightforward as VAT on domestic sales, and customs duties are also part of the picture that isn't always clear.

Over the past ten years, we've seen many freelancers and companies make mistakes in calculating VAT on imports, fail to report properly, or miss deductions they were entitled to. This can result in penalties, reductions in future reports, or even a tax authority audit. The purpose of this guide is to explain to you simply — without unnecessary tax jargon — how it actually works, what mistakes we see frequently, and when it's worth consulting a CPA.

We handle bookkeeping services and tax consulting for businesses of all sizes, including importers and companies that source goods from abroad. What we've learned is that a basic understanding of the import process and VAT saves time, money, and headaches.

What is VAT on Imports and Who Does It Apply To?

VAT on imports is a value-added tax that applies to goods entering Israel from abroad. Unlike VAT on domestic sales, which is calculated on the price at which you sell, VAT on imports is calculated based on the total value of the goods at the point of entry into Israel — including your purchase price abroad, transportation costs, insurance, and customs duties.

For this matter, you should also check the customs duties applicable to the goods. Customs duties are a separate tax designed to protect domestic industry and generate government revenue. Customs and VAT are two different things, but they work together: customs duties affect the final value on which VAT is calculated.

Who needs to know this? Nearly every business owner who imports. This includes:

• Sole proprietors and independent business owners — whether you import raw materials for your own production or a small business owner importing goods for resale.
• Limited company owners — any company with regular or one-time imports.
• E-commerce businesses — those who sell through Amazon or eBay and purchase goods from abroad.
• Startups and technology companies — even if you only import parts or equipment for your operations.

If you are an exempt business owner (annual income up to NIS 90,000), you still need to understand VAT on imports because in certain circumstances it applies to you, and it also affects your tax reporting to the tax authority.

How VAT and Customs Duty on Imports Work — Step by Step

Let's go through the practical process. When your goods arrive at a port or airport in Israel, they cannot enter Israel freely. They must undergo a customs clearance process.

1. Arrival of Goods at Port: The goods arrive at the port or airport. Your carrier or agent submits documents (Bill of Lading, Invoice, Packing List) to the Customs Authority.
2. Valuation Assessment: The Customs Authority inspects the value of the goods. This is not just the price you paid — it also includes transportation costs, insurance, and other payments until the point of entry into Israel (this is called CIF — Cost, Insurance, Freight).
3. Calculation of Customs Duty: According to the HS code (Harmonized System) of the goods, the Customs Authority determines the customs duty rate. These rates vary depending on the type of goods — some are 0%, some 5%, some 15% or more.
4. Calculation of VAT: On the final value (purchase price + transportation + insurance + customs duty), VAT is calculated at a rate of 17% (the standard rate in Israel).
5. Payment and Clearance: You pay the customs duty and VAT to the Customs Authority. Only then is the merchandise released and can enter Israel.
6. Report to the Tax Authority: Government records of each import are automatically transferred to the Tax Authority. This affects your periodic reporting (monthly or periodic VAT report).

One point that is not always clear: when you pay VAT at the port, it is not a final expense. If you are a licensed business operator (a business owner who reports VAT), you can deduct this VAT from the VAT you owe to the Tax Authority on your sales. This is called "VAT deduction" or "reduction of tax liability".

What You Need to Know About Tax and Reporting in Imports

When discussing VAT on imports, there are several principles you should understand:

VAT Deduction on Imports — If you are a licensed business operator (a business that reports VAT), you can deduct the VAT you paid at the port from the VAT you owe to the tax authority. This means that in effect, you pay VAT only on the difference between what you purchased and what you sold. This is the principle of VAT — a tax on added value only. A exempt business operator cannot deduct VAT.

Exempt Business Operator and Imports — If you are an exempt business operator, you still need to pay VAT at the port when importing. You simply cannot reclaim it. It remains a cost for you. If your imports are substantial, this can significantly impact your profitability.

Periodic Reporting — As a licensed business operator, you report VAT in a periodic return (usually monthly or bimonthly, depending on your classification). Your imports are reported in a column for "VAT on Imports" or "VAT on Inputs". The tax authority is aware of all your imports because it receives the data directly from the Customs Authority.

Customs Duties and Their Impact — Customs duties are part of your costs. When VAT is calculated, it is calculated on the total value (including customs duties). This means that any increase in customs duties also increases VAT. For example, if you purchase goods for $1,000, shipping for $100, and customs duties for $200, the final value is $1,300. VAT will be calculated on $1,300 (approximately 221 NIS at a rate of 17%).

VAT Exemption on Imports — In certain circumstances, certain goods are exempt from VAT on imports. For example, certain books, medicines, and medical equipment are exempt. If you import goods that are exempt, you do not pay VAT at the port. It is important to verify this with your customs agent or with an accountant before importing.

Common Mistakes and How to Avoid Them

In the years we have worked with importers and companies, we have seen mistakes that repeat themselves. Here they are:

• Misunderstanding the Difference Between Customs Duties and VAT — Many people think they are the same thing. They are not. Customs duties are a tax on the import itself, VAT is a tax on value. Both are paid at the port, but they are calculated differently and have different implications.
• Failure to Report Imports in the VAT Return — Some business operators pay VAT at the port but forget to report it in their periodic return. The tax authority catches this because it has data from the Customs Authority. This can trigger an audit.
• Attempting to Use an Incorrect Value — Some business operators try to use a value lower than the actual value to save on VAT. This does not work. The Customs Authority reviews the value, and if it discovers a misrepresentation, it can result in a substantial fine.
• Lack of Awareness of Deduction Rights — Licensed business operators who do not know they can deduct VAT on imports. This can leave you with an excessive VAT liability.
• Small Imports That Are Not Reported — Some self-employed individuals import small goods (for example, through Amazon or AliExpress) and do not report them because "it is small". Every import, even a small one, must be reported. If it is large enough to have VAT on it, it must be in the return.
• Failure to Maintain Documents — When you import, it is important that you keep all documents: Invoice, Bill of Lading, Packing List, Customs Certificate, and Payment Receipt. If the tax authority asks, you need to prove the import.

When Should You Consult with an Accountant?

Importing is not always straightforward, and there are cases where it is advisable to seek professional assistance:

If you are beginning to import for the first time — if this is your first import, it is advisable to obtain consultation on the process, your rights to VAT deduction, and the required reporting. An error at the beginning can affect all your future reporting.

If you are an exempt business and considering transitioning to a licensed business — this is a significant decision. An accountant can explain the implications of the transition, how much money you will save (or lose), and what the process entails.

If your import is large or complex — if you are importing full shipments, goods with high tariffs, or goods that may be exempt, it is advisable to consult with an accountant. A calculation error can cost you considerable money.

If you have received a notice from the Tax Authority or Customs Authority — if there is an inspection or question about your import, this is the time to consult a professional. An accountant or tax advisor can help you address this.

If you are a business that imports regularly — if importing is a regular part of your business, it is advisable to have an accountant's guidance. This can save you errors, ensure you are utilizing all your deductions, and simplify your reporting.