When the Taxi Deviates from the Route: Breach of the Conditional Tax Exemption in the Transportation Sector – More Than Just a VAT Issue

Many taxi drivers in Israel are unaware that the benefits they receive from purchase tax are not inevitable. The exemption from tax granted when purchasing a taxi is a conditional exemption, with a strict set of obligations – and violating the conditions may lead to a demand for payment of tax differences, fines, and sometimes even an investigation.

Ostensibly, this is a positive incentive – the state wants to encourage accessible public transportation and therefore exempts those who purchase a taxi and operate it legally from purchase tax. However, this benefit may become a trap when the driver exceeds the permitted use, does a “favor to a friend”, transports customers without a meter, or provides services that do not fall under the category of “public transportation”.

So what does the exemption really include – and when does the state demand it back?

According to the procedure for approving the import, purchase, use, and possession of a tax-advantaged taxi, the exemption from purchase tax is granted only when all of the following conditions are met:

• The vehicle has a valid taxi operating license (public right)
• The taxi is actually operated at least 240 days a year.
• The vehicle is intended and used exclusively for public transportation – not for private, other business uses or the operation of deviating services.
• The taxi carries a meter and identification marks as required.
• The public right to release a taxi has not been used more than once a year.

The procedure also clarifies that if a permanent license has not been issued within 14 days of the taxi’s release from customs, the full tax must be paid, as if it were a private vehicle.

What is a conditional exemption violation – and what does it look like in the field?

Here are some particularly common examples:

• Transportation according to fixed agreements with companies, without a metered rate – transforms the service from a public taxi to a private commercial service
• Use of the vehicle for personal, family or other business transportation – any non-public use violates the benefit.
• Releasing a second taxi on the same public right in the same year – immediate cause for cancellation of the benefit
• Failure to meet 240 days of operation per year – even if it is a temporary break due to illness or downtime
• Lack of a valid taxi license or transfer of ownership without reporting – creates a liability for a full tax refund

And when the violation is discovered?

From the tax authority’s perspective, this is an abuse of a tax benefit. The response can be swift and painful:

• Charge for a full refund of the purchase tax (sometimes tens of thousands of shekels)
• Interest and linkage penalties
• Denial of future rights to import or purchase taxis
• Opening a criminal investigation – and in serious cases, even filing a criminal indictment

The big problem? Most drivers violate the terms without knowing it. They mistakenly believe that once a vehicle is defined as a “taxi,” they are allowed to drive whoever they want, whenever they want, by whatever method they want.

5 Warning Signs – This is How You’ll Know You’re on the Road to Trouble

1. You don’t carry a meter regularly in the vehicle.
   Mandatory – even if you only work on regular transportation.
2. You transport employees of only one company at a pre-agreed rate.
   This is no longer a public taxi service – it’s a transportation company.
3. You have owned more than one vehicle on the same public right-of-way in the last year
   According to the procedure – it is strictly prohibited.
4. You have not actually used a taxi for at least 240 days a year
   Violation of a basic condition of the benefit – even if the termination is justified.
5. You use the vehicle for private transportation (weddings, tours, events)
   Any use other than public transportation may be expensive.

Questions taxi owners ask – and it’s time they were truly answered

• If I transport tourists at a fixed price – isn’t that public transportation?
  Not necessarily. If there is no meter, no public fare, and the trip is coordinated in advance – it may be private transportation.
• What if I didn’t use the car for 240 days because I was sick?
  May still be considered a violation. It is recommended to present certificates and try to prove exceptional circumstances.
• If I sell the vehicle and transfer the right to someone else – what happens to the benefit?
  If the vehicle conversion process is not completed according to the rules, the benefit is canceled.
• Does the Tax Authority really check this?
  very. There are surprise inspections, surveillance, and even technological data analysis to detect inactive taxis.
• If I am asked for a tax refund – is there anything I can do?
  yes. You can submit an objection, request a hearing, and sometimes even appeal – provided there are good reasons and professional guidance.

So what do we do to avoid getting into trouble?

• Maintain accurate records of annual activity days
• Regularly run counters – even if it’s not “convenient”
• Review any agreement with a business entity in advance with a tax advisor.
• Do not use a taxi for non-public transportation.
• We consult before purchasing another vehicle or transferring ownership.

In conclusion: the exemption is not a reward – it is a conditional benefit.

The state does not grant exemptions from purchase tax to those who use their vehicle as a work vehicle or private transportation undercover. It is a system based on trust – and those who violate it pay. Sometimes dearly.

If you own a taxi – don’t assume that “everything is fine” just because you paid the licensing office. The law requires much more than that. And in this area, ignorance is not a defense – it’s an invitation to an inspection. And if someone in a tax authority uniform knocks on the door – this is no longer the time to check what the procedure says.