Position on Decree-Law No. (26) of 2024 Regarding VAT
The Civil Society Team for Enhancing Public Budget Transparency: The issuance of a Palestinian VAT law is an important step in reforming the tax system
After a long discussion by the relevant governmental and civil parties on the drafts of the VAT law, Decree Law No. (26) of 2024 was approved on 31-12-2024, as the first Palestinian VAT law (an indirect tax on consumption, imposed on goods and services supplied at each stage of the supply chain, in such a way that the final consumer bears the cost of this tax, and the businesses and companies registered in the tax calculate and collect it in favor of the government).
It is noteworthy that the previous practice was based on Article 6 of the Paris Protocol, which stipulated that VAT in the Palestinian Territories would be imposed in accordance with what is applied in Israel, with the possibility of varying the tax rates in the Palestinian territories by no more or less than 2%.
In light of this, CSTEPBT considers this decree-law an important step in reforming the tax system and legal environment, contributing to increasing tax revenues and expanding the tax base. Despite its importance, the Team makes the following observations:
- Despite the involvement of civil society organizations, the private sector, academics, and specialists in discussing several drafts of the VAT law, issuing important laws without an appropriate legislative environment or a functioning Legislative Council increases legal burdens and complexities.
- The law will contribute to expanding the tax base by covering many sectors such as e-commerce, financial services, property transfer regulation, the real estate sector, and others, which will lead to an increase in tax revenues, if compliance and efficiency in revenue collection are achieved.
- The VAT law kept the rate of 16%, which is the same rate approved before the adoption of the law and allowed according to the Paris Protocol, while Clause 2 of Article 2 allowed the Council of Ministers to amend the tax rate or impose different rates based on the recommendation of the Minister [of Finance], and Clause 3 allowed the Council of Ministers, based on the recommendation of the Minister, to impose the tax in a lump sum on small liberal professions and services sectors, whose owners find it difficult to manage their books of accounts as stipulated by the law due to the nature of those businesses. Therefore, there is a need to involve civil society organizations, academics, and experts in the preparation of the law’s executive regulations, in order to ensure the enforcement of social justice through the gradual imposition of VAT on various goods and services. IT is also useful to benefit from the experiences of other countries in this regard.
- The Team believes that there is a need for a system of specific criteria and guidelines for estimating and determining tax rates instead of imposing a lump sum on the self-employed sectors, as the scope of discretion granted to determine the tax may lead to a large disparity in the estimated amounts between different sectors, even between individuals within the same industry, which may lead to an increase in tax evasion cases, in the absence of specific criteria for determining the amounts
- Although Article 4 exempts non-profit organizations from paying the tax, the second clause may hinder the work of NGOs and their developmental role, with the following stipulation: “Tax shall be imposed on non-profit organizations in accordance with the rates stipulated in the provisions of Article 2 of this Decree-Law on any business or activities in which it competes with the private sector, except for those that fall within the main charitable purpose of the organization.” The failure to specify the criteria for competition gives the director wide discretion to determine which activities are taxable.
The implementation of the law requires the issuance of executive regulations and the training of specialized personnel to apply it, and achieving the goal of the law is possible if it is integrated with other laws, which requires the establishment of a unified database for all sectors and establishments, and the strengthening of control and compliance mechanisms. Accordingly, the Civil Society Team believes there is a need to form a permanent committee from the Ministry of Finance, relevant ministries, civil society organizations, experts, and academics to discuss the executive regulations and other provisions.
