Real-time VAT and daily accounting: How the Tax Authority's new plan will work
The Israel Tax Authority is promoting a new plan, "Israel Invoice 2.0 - VAT Online," aimed at shifting VAT reporting and payment to a real-time digital infrastructure. The reform seeks to reduce tax fraud and streamline business operations.
The Tax Authority is promoting a new plan, "Israel Invoice 2.0 - VAT Online," which aims to change the reporting and payment model for value-added tax and move to collection on a digital infrastructure in real time. The move comes against the backdrop of ongoing structural failures in the existing system, which was enacted about 50 years ago, and proposes a transition to automatic reporting alongside an attempt to reduce tax fraud.
What is the current model for reporting and paying VAT?
VAT is an indirect tax imposed on consumption and rolled along the production and marketing chain until it reaches the final consumer. Along the way, every business in the chain is required to collect VAT from its customers, offset from it the VAT it paid to its suppliers (input tax), and transfer the difference to the Tax Authority. For example, if a winery sells crates of wine to a restaurant for the amount of 10,000 shekels plus 18% VAT (1,800 shekels), the winery collects the VAT and the restaurant offsets it as input tax. When the restaurant sells the wine to customers for a total amount of 20,000 shekels plus VAT (3,600 shekels), it will collect the VAT from the diners, offset the 1,800 shekels it paid to the winery, and transfer to the state only the difference — 1,800 shekels.
Today, the obligation to transfer the tax to the state is determined by the time the transaction is executed and the invoice is issued (delivery of the product or provision of the service), regardless of the time the payment was actually received from the customer. The calculation and transfer of money are not performed immediately for every transaction, but centrally at a fixed time: once a month or two months (usually by the 15th of the month, depending on the size of the business's sales turnover). The business owner summarizes in one periodic report the total VAT collected from all customers in that period, deducts from it the VAT paid to all its suppliers, and transfers the net amount in one payment to the Tax Authority.
What are the main difficulties created by the existing system?
The first difficulty is the damage to cash flow: in a reality where businesses operate under long credit terms ("shotef plus"), the VAT law requires them to transfer the tax to the Tax Authority before the payment has actually been received from the customer. On the other hand, for businesses that collect cash immediately, the centralized reporting creates a temporary "cash flow credit" — the VAT funds sit in their bank account and are used by them as liquidity until the payment date on the 15th of the month.
The second difficulty is bureaucratic complexity: business owners are forced to collect and file physical paper invoices in binders. Loss or fading of an invoice can deprive the business of a VAT refund. In addition, the need to manually re-enter data in the offices of tax representatives (accountants and tax advisors) costs businesses high expenses and creates an opening for human errors in reports.
What is the main change in reporting and paying VAT?
The core of the reform is based on upgrading the existing technological infrastructure in the economy and connecting all accounting software, cash registers, and payment methods via a direct line (API interfaces) to the Tax Authority's computers. The significant change is linking the VAT payment to the actual cash mechanism: the tax liability will apply solely at the moment the money is deposited in the bank account, and not at the time the invoice is issued. In the case of transactions with installment payments, the VAT payment will be split accordingly at the time each installment is received. This mechanism eliminates the need for businesses to "finance" taxes during the credit period and allows for real-time accounting instead of centralized waiting for the 15th of the month. The Tax Authority has not yet decided who will manage and actually perform the transfer of funds and VAT clearing — whether it will be private accounting software or clearing and payment bodies (banks, credit card companies, and apps).
How will the new model affect the business's routine conduct and tax refunds?
Instead of manual collection of binders and filing of papers, the Tax Authority will concentrate all transactions on a personal digital account page of the business, in a format resembling a bank app. The central computer will perform an automatic daily accounting that sums up the VAT collected against the VAT paid on inputs on that same day. If the business is entitled to a refund, the money will be deposited directly into its bank account at the end of the day — without having to wait for the periodic report of the 15th of the month. In addition, the digital and transparent infrastructure is intended to reduce the preliminary suspicion and manual checks currently imposed on legitimate businesses when opening a new file in VAT offices.
How is it proposed to eradicate fictitious invoices?
The phenomenon of fictitious invoices — in which invoices are issued for transactions that did not occur in order to offset input tax without transferring it to the state — creates an annual collection gap estimated at about 15 billion shekels. To deal with it, the reform proposes a path of payment separation: the purchasing business transfers to the supplier only the net price (100%), and the VAT component (18%) is transferred directly and online to the Tax Authority. Upon payment, a digital "payment confirmation number" is issued, allowing the issuance of an invoice, and thus the ability to collect the tax without transferring it to the state is neutralized. For example, in a wine purchase transaction for the amount of 10,000 shekels plus VAT (1,800 shekels), the restaurant (the purchasing business) will be able to transfer to the winery only the net price, 10,000 shekels. The restaurant will transfer the VAT directly and online to the Tax Authority. The winery is completely exempt from collecting the VAT payment from the restaurant that reported in this way, and the state receives the tax funds directly without fear that they will disappear along the way.
What are the VAT collection data and the weight of the tax today?
The VAT law is a central component of state revenues. VAT collection amounted to 143.3 billion shekels in 2024 (about 30.2% of total government tax revenues), and the collection estimate for 2025 and 2026 is 145.5 and 167.2 billion shekels respectively. The transition to an online infrastructure is intended to ensure the stability of tax collection while reducing the bureaucratic burden on economic activity.
