Revenue from value-added tax (VAT) on domestic transactions fell by 45.9% in the second quarter of 2026 compared with the same period last year. The decline reflects the economic fallout from the war, a drop in arrivals to Lebanon and weaker commercial and tourism activity. Rising prices following the regional conflict and a surge in global oil prices have also weighed on consumers. The figures point to weakening domestic consumption, although they do not necessarily reflect the full extent of the contraction. According to the Finance Ministry's report for the first half of 2026, domestic VAT revenue fell from about 25.1 trillion Lebanese pounds in the second quarter of 2025 to 13.6 trillion pounds in the same period this year. By comparison, VAT collected on imports declined by just 6.2%. Overall VAT revenue fell by 24.7% in the second quarter. The trend also appears in the first-half figures. Domestic VAT revenue dropped by 10.8% to 28.1 trillion pounds, while VAT collected on imports rose by 2.5% to 52.7 trillion pounds. Imports therefore accounted for about 65% of total VAT revenue in the first six months, compared with 35% collected from domestic transactions. The distinction matters because the two sources reflect different economic activities. Domestic VAT is linked to taxable sales and services, making it sensitive to economic activity and consumer spending. Import VAT is collected when goods enter the country. It depends on the value and composition of imports, but does not necessarily reflect their final sales in local markets. Higher collections from increased duties may temporarily offset some losses, but they do not signal a recovery in consumption or broader economic activity, which underpin sustainable tax revenue. However, the sharp second-quarter decline must be considered in light of changes to tax payment deadlines. In 2025, the Finance Ministry extended the deadline for declaring and paying VAT for the fourth quarter of 2024 until June 20, 2025. This shifted part of the revenue collection into the second quarter of that year. That partly explains the exceptional 126.3% increase in domestic VAT revenue in the first quarter of 2026, followed by the sharp decline in the second quarter. The 45.9% drop in collections therefore does not necessarily indicate an equivalent fall in consumption. Still, other indicators point to weaker consumer activity. Arrivals to Lebanon fell by 37% in the first half of 2026, from about 1.6 million to 1 million, according to figures from the Central Bank of Lebanon cited in the report. Departures also declined by 27.4%. The drop in arrivals likely affected spending on accommodation, restaurants, retail and tourism services, all of which contribute to domestic tax revenue. These developments have also affected overall tax collection. After rising by 45.1% in the first quarter, tax revenue fell by 12.7% in the second quarter. Some revenues from import duties and fuel taxes continued to rise, reflecting higher tax rates. The figures raise questions about the state's ability to maintain revenue levels if domestic economic activity remains weak. Higher collections from increased duties may temporarily offset some losses, but they do not signal a recovery in consumption or broader economic activity, which underpin sustainable tax revenue. This is an edited translation of a report originally published in Arabic.
