Bill, proposed by hardline and extreme-right minister Itamar Ben-Gvir, states that anyone who kills an Israeli citizen should be sentenced to death.
The Israeli parliament [Knesset] in a preliminary reading has passed a bill that would legalise capital punishment for those who are charged with terrorism offences.
The bill was approved on Wednesday by 55 to nine votes, according to a statement.
The controversial bill states that someone who kills an Israeli citizen with a racist motive or for the purpose of harming the state of Israel should be sentenced to death.
The proposed bill must be approved and enacted in three voting sessions to be held in the Knesset after being accepted by the government.
Itamar Ben-Gvir, the far-right national security minister and leader of the extreme-right Jewish Strength Party submitted the bill to parliament.
Netanyahu formed a government two months ago, promising his far-right coalition partners to limit the Supreme Court's ability to strike down legislation or rule against the executive and to entrench Israeli control of the occupied West Bank.
Netanyahu, on trial on corruption charges that he denies, says the changes will restore balance between the branches of government and boost business.
The overhaul has yet to become law but it has already affected the shekel currency.
Businesses and economists say the planned reforms could harm Israel as an investment destination.
'Ugliest form of racism'
Last month, Israel passed a law that would allow authorities to strip people who have been jailed of citizenship or residency if they receive Palestinian funds for actions deemed as "terrorism."
Under the new law, Palestinians from occupied East Jerusalem who directly or through their families receive stipends from the Palestinian Authority after having been jailed in Israel for security offences, can be deported to the Palestinian territories.
It could also apply to some members of Israel's Arab minority, many of whom identify as or with the Palestinians.
Palestine has described the law as "the ugliest form of racism."