What, not just on imports?
Purchase tax, imposed under the Purchase Tax (Goods and Services) Law, 1952, is an Israeli indirect tax which, as a general rule, applies equally to imported goods and domestically manufactured goods. Today, the tax is imposed on a relatively limited range of products, including motor vehicles, certain vehicle parts, alcoholic beverages and tobacco products.
Historically, purchase tax was regarded primarily as a luxury tax, imposed on expensive products considered non-essential. Over the years, its purpose and characteristics have changed, and it is now imposed mainly on products whose consumption entails negative externalities. Through the tax, the State seeks either to reduce the consumption of such products or to ensure that those who use them bear at least part of the costs their use imposes on the public.
Purchase tax disputes may also arise in relation to domestic production – for example, concerning the correct classification of a product, whether it is subject to tax at all, or the wholesale price on which the tax should be calculated. Following an audit, the Israel Tax Authority may issue an assessment against the manufacturer. The assessment procedure for purchase tax on domestic production is broadly similar to that applicable to VAT: an objection may be filed against the assessment and, where necessary, the decision may be appealed to the District Court.
While purchase tax on imported goods is calculated on the basis of their customs value, together with the additional components prescribed by law, purchase tax on domestically manufactured goods is calculated on the basis of the “wholesale price” – the price at which the product is ordinarily sold by a wholesaler to a retailer. Where a manufacturer sells the product directly to the final consumer, or where the distribution chain differs from the conventional structure, a dispute may arise as to how the wholesale price should be determined for the purpose of calculating the tax.