Time to review: Revised tax legislation should help reduce fiscal pressure

Amid rising debt and reduced growth, the government is working to balance measures to boost revenue and stimulate the economy with efforts to reduce public spending. In a delicate political climate, the government is undertaking a review of fiscal legislation in an attempt to carefully rebalance, rather than completely overhaul, key taxation and subsidy legislation.

According to official figures from the Income and Sales Tax Department (ISTD), total tax revenue reached JD2.76bn ($3.9bn) in 2011, 4.7% higher than the JD2.64bn ($3.7bn) collected in the previous year. Revenues from income tax totalled JD686m ($964m), which fell somewhat short of the JD774m ($1.09bn) collected in 2010. The ISTD figures show sales tax revenues increased by 3.9% to JD2.1bn ($3bn) in 2011, an impressive jump from the JD1.7bn ($2.4bn) collected in 2009. The rise in revenue was not expected given the cancellation of certain taxes, such as the one on petrol, diesel and kerosene. Instead, revenues grew as a result of a slight rise in the number of taxpayers and an improved collection strategy that followed up on accumulated amounts owed. However, this indicates payment of arrears rather than a genuine increase in the amount of taxable wealth and spending in the economy in 2011, meaning this will be a one-off rise.

REBALANCING TAX: Income tax contributes only 25% of revenue generated by the ISTD, and some may argue this is a good thing, alleviating the tax burden on low-income families. The fall in income tax collection is attributable to exemptions introduced in a 2010 draft taxation law designed to increase investment and simplify the tax regime for citizens, which raised the lower-level tax exemption of individual earnings to JD12,000 ($16,862) and family earnings to JD24,000 ($33,725) per annum. Under the law, family income can be reduced further with a deduction of JD12,000 ($16,862) for each dependent. But with average annual wages of JD4944 ($6497) for public employees and JD4056 ($5699) for private employees, according to 2009 data from the Department of Statistics, this means a large number of Jordanians earning incomes far higher than the average do not pay tax. This indicates the system favours flat rate consumption tax, which can actually harm those on low incomes if they are taxed on essential items such as food, clothing and energy, as a greater proportion of income is spent on essentials.

The draft law also brought in lower tax brackets for corporations, with banks qualifying at a rate of 24% corporate tax to encourage investment, which has provoked calls for revisions given recent profits. Having trialled the new corporate tax bands and income boundaries established in the 2010 draft law for two years, a parliamentary review is under way to assess the outcomes ahead of finalising the legislation.

MODERNISING PAYMENTS: Efforts to modernise and ease payment of tax are being led through the introduction of online services. Since 2005, 19,000 usernames have been granted by the ISTD to high-earning tax payers, although the number actively using the system is lower. For shopkeepers paying sales tax, instalments can now be made through one of nine banks involved in the scheme and income tax instalments can be paid through the Housing Bank.

RETURN OF HOMEBUYER TAX: One notable exemption to be cancelled is the tax and fee exemptions on homebuyers of properties larger than 100 sq metres. The exemption, which was brought into force in 2009 to stimulate the domestic real estate sector, has deprived the treasury of nearly JD400m ($562m) over the past three years, according to statements made by the former finance minister, Umayya Toukan.

Other measures being considered to alleviate pressure on the budget focus primarily on the state’s generous subsidy system, including directing fuel subsidies to low- and medium-income households and imposing graduated increases of electricity and water tariffs based on consumption. Excluding the wealthy from the energy subsidy will save around JD250m ($351.3m) a year. The Ministry of Finance is also reviewing a list of 260 items and services exempt from sales tax.