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Israeli fashion industry prays for new finance minister

Israeli fashion companies blame Finance Minister Moshe Kahlon for a collapse in the local industry, but the tax exemption accorded to online purchases from abroad is unlikely to be repealed.

The Israeli business sector, the fashion industry in particular, is eagerly awaiting the election and a chance to replace its No. 1 nemesis, Finance Minister Moshe Kahlon. It has been a year since the Israeli Chamber of Commerce, organizations representing independent businesses and the Association of Labor and Industry in Israel filed suit against the minister in the Supreme Court against the VAT exemption for online purchases from abroad. In November, the court declined to intervene in the minister’s economic policies.

At the heart of their dispute is an exemption for individual consumers from paying VAT (and customs duties) on purchases worth up to $75 from international websites. The value-added tax in Israel, the same for virtually all products, is 17%, among the highest in the world. However, Israelis who make purchases from international websites are not required to pay it if the sum of the purchase does not exceed $75. All purchases up to $500 are exempted from custom duties.

“While I pay VAT the moment my goods arrive in Israel, spend a fortune on rent and logistics and create employment for 400 Israeli families, manufacturers overseas, who do not pay taxes here and do not employ a single person, enjoy a better starting point — 17% cheaper, in fact, as compared to local industry,” Dedy Schwartzberg, founder and CEO of the Adika online fashion store, told Al-Monitor. “The finance minister prefers to compensate European companies like ASOS and Next, which grow at crazy rates here. He sends a fortune out of the country and causes local chains to collapse, all for populist reasons.”

Schwartzberg was talking about the fall over the last year and a half of a long list of major Israeli companies, particularly in the fashion industry. It began with the Israel franchise of the men’s fashion brand Celio, which was swamped in debt and forced to sell its holdings, and continued with Honigman, which also had a controlling interest in the TNT clothing stores. Then followed the Zebra stores, the children’s fashion label Mish-Mish, the Ramilee line of maternity clothing, Wertheimer Sports fashions and the Sketch and Mausner fashion lines. On March 14, the clothing store Matim Li joined this dubious club. Each of them employed hundreds of people and had dozens of brick-and-mortar stores. According to figures released by economic analysts Dun and Bradstreet, 701 Israeli businesses dealing in fashion shut their doors in 2018, up from 396 in 2017.

As of 2017, Israel led the Organisation for Economic Co-operation and Development in terms of online purchases per capita relative. Figures from the Israeli postal system also show that Israelis buy from overseas at huge rates. While some 22 million packages were ordered from overseas in 2012, the number almost tripled to about 65 million in 2018. Another interesting factor that suggests something about the value of these purchases is the weight of the packages. In 2012, the packages’ total weight stood at 2.5 tons, while in 2017, it had risen to almost 11 tons. In another interesting statistic, 95% of these imported packages did not meet the VAT threshold, meaning Israeli consumers are taking full advantage of the tax loophole.

Despite vociferous opposition from Israeli business owners, Kahlon has stated that he will stand firm on this issue. “I am facing enormous pressure to repeal this benefit, but whoever thinks that repealing it will stop this trend of buying online does not understand what is happening in the market,” he said in a conversation with Al-Monitor. “This benefit is focused on the problem of the cost of living. There isn’t a single citizen who does not benefit from it, both directly and indirectly. This benefit dates back to the time of the Trachtenberg Committee [on reducing the cost of living], and I think it is balanced. The sum of $75 is a reasonable balance.”

“This whole $75 story is a classic Israeli bluff,” Schwartzberg argued. “The fact is that even packages worth more are not required to pay VAT. To an impartial onlooker, this would look like a corrupt conspiracy that serves the interests of the Israeli postal system, politicians and major European fashion brands.” Schwartzberg is convinced that the upcoming election will put an end to this farce. “I hope that Kahlon is replaced, because any professional finance minister would repeal this travesty on his first day in office. But even if Kahlon stays on, I believe that he also realizes that he has no choice but to come to his senses over this. Otherwise, the collapse of an entire branch of the Israeli economy will be forever attributed to him. The trend everywhere else in the world is the exact opposite of what he is doing, because they realize that this is a mistake.”

Elad Hayun, who runs the Consumer Justice website, is convinced that the VAT benefit for the private consumer was indeed implemented as a result of the rising cost of living in Israel and that it will not be repealed anytime soon. “The claim that the 17% VAT is the issue is wrong,” he told Al-Monitor. “Israeli importers have been acting piggish for years. For example, we see a [price] difference of 200% in toiletries. The same is true of fashion. Sometimes there are unreasonable differences in cost between Europe and Israel for the exact same product. Even if the government requires people buying online to pay the 17%, it would not stop the trend of Israelis making purchases overseas.”

Hayun claims that market forces operate independently and that the world is becoming a more global market anyway, meaning that many importers and shops will cease to exist. “Delivery services are becoming more and more effective. Even when it comes to warranties, things are improving dramatically. The Israeli customer makes a simple calculation. When buying from an international website like Amazon, for example, he receives a high-quality product with the best service in the world. When he buys a product in Israel, on the other hand, the seller may not have the exact product in stock, and the service does not compare to international norms. In the fashion industry, there isn’t a single Israeli manufacturer that can compete with the selection available on websites overseas. In my opinion, in the long run, only international websites will be able to offer selection at a reasonable price with high-quality service, so they will be the only ones to survive,” he said.

Online shopping has taken firm root in Israel. Now that people have gotten used to the tax benefit, it is hard to believe that any politician would do something so unpopular as repealing it and position himself as an enemy of consumers. Kahlon made it clear to Al-Monitor that even after the election, and assuming that he remains in his position, he has no plans to change the current situation. “Despite all the pressure, the exemption will remain as is as long as I am finance minister. I was sent by the people to represent them and act on their behalf. Merchants will simply have to adapt to a new world,” he concluded.

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