The cost of war: Israel’s New Year’s VAT increase will hurt your pocket

When Israelis go shopping this January 1st, they may not immediately feel the slight increase in their bill. But that’s the day Israel’s Value Added Tax (VAT) is set to climb from the current 17 percent to 18%. At first glance, 1% may seem inconsequential, but in an economy where VAT affects nearly every transaction, this small amount will have substantial real-world implications: from our groceries to the car or home we dream of purchasing, the increase will ripple through every aspect of our financial lives.

This isn’t uncharted territory. Between 2012 and 2015, VAT sat at 18% before dropping back to 17% in October 2015 — a fiscal dance that continues to impact our financial landscape. Once again, household budgets, business expenses, and plans for large purchases need to be readjusted, taking into account that paying just 1% more in tax on a large purchase can have a significant impact.

Planning on buying an apartment in the coming year? The impact on real estate will be particularly stark. Imagine a homebuyer with a NIS 2 million balance on a brand new property from a developer. That 1% VAT increase translates to an additional NIS 20,000 — not an inconsequential sum. This scenario plays out across countless ongoing property developments, potentially affecting everything from personal budgets to broader market dynamics.

Businesses will face their own set of challenges. While some might view the VAT increase as an opportunity to subtly adjust pricing beyond the mandated 1%, others will need to manage increased costs and maintain competitive positioning carefully.

But primarily, the increase will affect our daily lives as consumers. We may see an incremental rise in our monthly grocery bill, which will add up and affect our annual budget. Large purchases, such as household appliances, furniture and cars, will see a more significant increase in cost. For example, a NIS 1,000 purchase will now cost NIS 1,180 instead of NIS 1,170. Fortunately, not everything gets taxed. Fresh produce, certain financial services, and purchases in Eilat will remain VAT-exempt.

Preparation is key to approaching the change strategically. Real estate buyers should consider accelerating final payments if possible. Business owners should review contracts, update systems, and plan for potential cost absorption or price adjustment. Individual consumers might benefit from evaluating budgets, considering the timing of significant purchases, and maintaining flexibility.

This VAT increase is one of the many economic consequences of war. And like every financial challenge we’ve faced, the change to VAT demands awareness, strategic planning, and our Israeli resilience. It is also a reminder that living in “financially smarter” ways isn’t only about numbers; it requires adaptability to navigate economic shifts.