Economy
Indirect taxes are Jordan's main source of government revenues, particularly on goods and services. Experts therefore have often described the country's tax system as biased toward taxes that do not differentiate between the poor and the rich.
Jordan's tax system includes direct taxation such as income tax on earnings and indirect taxation in the forms of sales tax and others.
Tax Revenues
Direct taxes target people and corporate income equally, such taxes are levied on businesses net profits, revenue of individuals, companies, banks, institutions, and all forms of entity that transact financially, and all that is accrued through sale, lease, services, commission, and others. A tax is usually also personal as it takes into account the social circumstances and conditions of each category of taxpayers.
Indirect taxes are not paid by individuals and companies directly to the government; rather, they are imposed by the state on consumption items and expenditures by taxing the production and sale of goods and services. The consumer pays these taxes as parts of the costs of goods and services purchased.
A study published by the Phenix Center for Economics & Informatics Studies in 2017, listed the various types of taxes in Jordan, which include Income tax; general tax on sales; customs taxes and duties; licensing fees; social tax (social security); additional taxes; telegraph, post and telephone fees; building tax; fuel taxes, among many others.
The study confirms that the tax system in Jordan is biased toward indirect taxation. Indirect taxation, particularly the general sales tax, have become the main source of government revenues; for example, the share of indirect taxes from the total tax and non-tax revenues of the state rose to 61% in 2009 and 69% in 2012, in parallel with a decline in the relative importance of income taxes in the same period, according to the source.
Experts from the Jordanian Economic Forum in 2020, said that tax revenues as a percentage of the gross domestic product (GDP) in Jordan are low compared with many countries of the world.
In a report published by the forum on the Jordanian public finances, experts have called for reinforcing tax revenues through a number of measures, including expanding the taxpayers' base through fighting tax evasion, reforming the business environment, attracting investments among other measures.
Analysis of the 2010-2021 general budget’s data reveals that goods and services taxes have increasingly accounted for the largest part of Jordan's tax revenue over the past decade.
The analysis also showed that the proportion of "goods and services taxes" share in the total local revenues rose from 47% in 2010, to 54% in 2021, but it has also recorded the highest value ever in 2020, reaching 57%.
As for taxes on income and profits, the increase in their percentage as per their share of the total local revenues did not exceed 1% for the same period.
There was a 7% increase in income tax collection for 2018, compared with 2017, but this is still low compared with the country's estimated collection that year, according to the Audit Bureau in 2020.
"The legislation on the imposition of criminal record and penalties for tax evaders and their enforcement in accordance with the law is inadequate," the report said.
At the same time, the ongoing changes in the laws, regulations, guidelines and instructions of the Income and Sales Tax Department, are weak in legislative terms, the report added.
The Jordanian government confirms that it has been conducting tax reforms for more than three years without imposing new taxes or increasing any taxes, according to the Income and Sales Tax Department's website in February.
However, the government is heading to impose an increase in the percentage of the so-called water tax from 3% to 10%, because of the steady increase in the cost of sewage treatment, and its inputs, electricity prices, and other services.
The vision of the economic modernization of the country, recently released by the Jordanian government, revealed a likely tendency to impose charges on road users in Jordan to enhance main roads quality and financial sustainability.
Economist Hossam Ayish explains that taxes in Jordan have increased significantly since 2018, but this has not been accompanied by an improvement in economic growth; this hints that people's incomes have shrunk as their taxes have increased, he adds.
Ayish says he believes that sales tax should be designed to operate in a downward trend, which means that its percentage is highest when charged on luxury goods often consumed by the rich, and then gradually decreases on universally consumed essential goods, making those on lowest and limited incomes pay a lower cost for their purchases.
According to Ayish, taxing goods is a blind process as it sees individuals with one eye. It amounts to 16% imposed on all goods and services categories, while wealth is excluded from paying income or wealth tax.
The economist pointed out that imposing special taxes on products and goods in addition to sales tax slants the process of taxation as a whole and reflects a diminished fairness in the treatment of people with regard to their tax burden. As spreading the tax burden equally on people with unequal incomes and expenditures, according to his estimation is counterproductive .
Jordan's public budget has witnessed a dramatic growth in the volume of current expenditure over the past decade, with a backdrop that saw a slight increase in capital expenditure directed to infrastructure projects.
The Jordanian government has repeatedly said it seeks to promote the principle of "self-reliance" in financing state expenditures, but this is mainly aimed at covering its current expenses, such as wages and running costs.
The general expenditure in the Jordanian budget is divided into current expenditures -and that includes annual recurrent expenditure to sustain the functioning of the government system, including wages, allowances, operating expenses, and so on.
Public expenditures also include a so-called capital expenditures, which are related to acquisition, construction and development and are usually directed to infrastructure projects in various sectors.
An analysis of public budget data for 2010-2021 reveals that the increase in capital expenditure did not exceed 12% during that period.
The highest capital expenditure in 2014 was about JOD 1.137 billion, while 2012 saw the lowest spending of JOD 675.4 million.
On the other hand, current expenditures continued to rise, seeing an 85% increase between 2010 and 2021.
Jordanian economists stress the necessity to increase the allocation of financial resources toward capital expenditure, and directing this increase toward projects with added economic value that could raise future revenues and supply money returns to the state treasury.
Capital expenditure’s decline in Jordan is not confined to financing the treasury, as experts from the Jordanian Economic Forum warn that the decrease of capital expenditure is the main reason for the decrease of public expenditure in the country. The dramatic decline in capital spending since the 1970s has had a negative impact on both infrastructure and human capital.
All that leads to a decline in the sufficiency and efficiency of public goods and obstructs the improvement of the economy, according to experts at the forum.
In this regard, economist Hossam Ayish points out that capital expenditure in the budget is mostly an ongoing expenditure under the name of "investment," thus achieving a modest return; hence, economic growth rates are not affected by its increase or decrease, he says.
A public budget deficit arises when the level of public expenditure exceeds the state's general revenue over a certain period of time.
Estimates indicate that the deficit in the general budget law for 2022 will reach JOD 2.4 billion without taking into account foreign grants.
The deficit is expected to be covered by borrowing, which will raise the overall total public indebtedness to JOD 38.8 billion.
The Jordanian government assumes receiving external grants of JOD 848 million, which is almost equal to what Jordan received last year when external grants reached JOD 840 million Jordanian.
The government budget relies on external grants, and part of these grants are directed to finance the states’ capital expenditures.
An analysis of the 2010-2021 budget shows that the lowest funding deficit, with the grants included, was recorded in 2014 at approximately JOD 583.5 million. This was in conjunction with an increase in the volume of external grants obtained by the government in that year at approximately JOD 1.236 billion.
The highest funding deficit, after calculating grants, was recorded in 2020 at about JOD 2.182 billion, while the government got grants of JOD 790.8 million.
According to Ayish, the continuation of the deficit means the continuation of debts, and this means deferred taxes to be paid by citizens in the future.