VAT Increase — How Does It Affect Your Business?

What is a VAT increase and how does it affect you?

An increase in the VAT (Value Added Tax) rate is a policy measure that directly impacts businesses, companies, non-profit organizations and business owners in Israel. When the VAT rate increases, it means that the prices you pay for business purchases will also rise, as will the prices you charge your customers — provided you are registered as an authorized business or a company required to file VAT reports.

Every business registered for VAT must understand the implications of the change: how it affects the final price, your monthly or periodic reporting to the Israeli tax authority, and your business cash flow. Without proper planning, these costs can significantly impact your business profitability.

Who is affected by the VAT increase?

• Authorized businesses: Businesses registered for VAT and required to file periodic reports (monthly or periodic) to the Israeli tax authority.
• Limited liability companies: Any company that provides services or sells products and is registered for VAT.
• Self-employed individuals in certain fields: Self-employed professionals in services, construction, building and repair — all of whom are registered for VAT.
• E-commerce and startup businesses: Digital businesses and platforms required to file VAT reports on transactions.
• Non-profit organizations: Non-profit organizations operating in certain fields may be required to file VAT reports.

In contrast, exempt businesses (businesses with low turnover or exempt by law) are not registered for VAT and do not pay or charge VAT — but they may be indirectly affected when purchasing products or services whose prices have increased.

The new VAT rate — what changed?

In recent periods, there have been changes to VAT rates in Israel. The standard VAT rate is the basis for calculating tax on most transactions. When this rate increases, every authorized business or company must adjust its prices and report correctly to the Israeli tax authority.

Impact on VAT calculation

Every authorized business pays VAT on purchases (business purchases) and collects VAT from customers (sales). The difference between the VAT collected and the VAT paid is called transaction VAT and this is the amount reported to the Israeli tax authority.

When the rate increases:

• The VAT you collect from customers increases (if you raise prices accordingly).
• The VAT you paid on business purchases also increases.
• The difference between the two — which is what you report — changes according to your purchase and sales mix.

VAT report and reporting to the tax authority

Every authorized business or company must submit a periodic VAT report to the Israeli tax authority (typically monthly or every two months, depending on your registration). The report includes:

• Total VAT collected (sales).
• Total VAT paid (purchases).
• The difference — this is the amount owed to the tax authority or the refund you will receive.

When the rate changes, report calculations change, and reporting must be accurate to avoid penalties or tax audits.

Scenarios — How VAT Increase Affects Different Types of Businesses

The impact of VAT increase varies depending on the type of business, the mix of purchases and sales, and the ability to transfer costs to customers. Here are several typical scenarios:

Scenario 1: Self-Employed Service Provider (Contractor, Designer, Consultant)

A self-employed service provider registered as a licensed business must increase their rate to cover the higher VAT. If previously they charged 500 NIS without VAT, now they must charge 500 NIS + VAT at the new rate. Their clients (who are businesses) will be able to recover the VAT, but private customers will have to pay more.

Scenario 2: Product Company (Warehouse, Retail Store, Export)

A company selling products pays VAT on every purchase from suppliers. When the rate increases, the cost of inventory increases. If the company raises prices accordingly, it maintains similar profit — but if customers resist price increases, profit will decrease.

Scenario 3: E-commerce Business or Startup

Digital businesses selling through platforms (such as websites, applications) must update prices on the platform and report correctly to the Israeli tax authority. They pay VAT on foreign services (if applicable) and charge VAT from Israeli customers.

Scenario 4: Exempt Business — Indirect Impact

An exempt business (for example, a small coffee shop or business with low turnover) is not registered for VAT, but purchases products from suppliers registered for VAT. The prices they charge to the exempt business have increased, so the exempt business must decide whether to raise prices or absorb the loss.

Comparative Table — Numerical Example

Here is an example of how VAT increase affects a periodic VAT return:

Note: This is a simplified example. In practice, each transaction must be examined separately, special deductions, and various exemptions.

In this example, the business owner must transfer an additional 150 NIS to the Israeli tax authority due to the VAT increase. This can affect cash flow if not planned in advance.

Practical Steps — How to Handle VAT Increase

1. Check Your VAT Registration

First, check whether you are registered for VAT. Exempt businesses do not need to do anything, but authorized business owners and companies must be aware of the change and report correctly.

2. Update Prices and Rates

Review your customer prices and determine whether to increase them according to the new rate. This depends on your business sector, competition, and your customers' ability to accept a price increase.

3. Update Accounting Systems

If you use accounting or business management software, ensure it is updated to the new rate. Calculation errors can lead to incorrect reports and tax audits.

4. Plan Your Cash Flow

If you are paying more VAT to the Israeli tax authority, this affects your cash flow. Plan ahead to ensure you have cash available for payment when reporting.

5. Check Entitlements and Benefits

In certain sectors (such as export, research, and technology) there may be tax benefits or partial exemptions. Check if you are eligible.

6. Use Accounting Advice

A meeting with an accountant can help you understand the precise impact on your business and plan future steps.