The New Income Tax Law: Who Wins and Who Loses?

The new Income Tax Law finally came into effect this year in an attempt to raise more government revenue. But what does it mean for individuals and businesses?

By Jane Hosking

Jordan’s long awaited, and debated, new Income Tax Law was finally introduced at the start of the year, replacing the temporary legislation that had been in place since 2009. Under pressure from the International Monetary Fund (IMF), the new law was developed to reduce the Kingdom’s deficit by 1 percent. According to the Tax Department, the changes made to the law are expected to increase government revenue by approximately JD100 million in 2016. But what does this new law mean for individuals and businesses? And does it have much hope of raising much needed revenue for the government?

Khair Abu Saleek, who chairs the Economic Committee of the Senate that was responsible for approving the law, told Venture the new legislation had two main objectives: protecting the middle class and reducing tax avoidance and evasion.

While the new law does increase penalties for those shirking their tax obligations and also introduces an additional tax bracket to target higher income Jordanians, the first tax bracket has been narrowed down which means that more people will fall in the second bracket, and as a result will have higher taxes. Previously the first JD12,000 above the tax-free threshold was subject to a 7 percent tax, but now the same tax is placed on those earning only JD10,000 above the tax-free threshold. Those who fall in the second tax bracket—earning a second JD10,000 above the tax free threshold—will be required to pay 14 percent tax.

While the new law does to a degree focus on the wealthier sections of the population with the introduction of the third tax bracket—requiring a tax of 20 percent above the second JD10,000 earned—it also puts a bigger burden on many middle class Jordanians.

The sector to benefit the most from the new tax law is agriculture. While previously agricultural businesses were paying 14 percent after the first JD75,000, as per the new law they are totally exempt from paying taxes. Abu Saleek explained that this provision is intended to help the sector grow. “I hope that this law will increase the contribution of the agriculture sector to GDP because the current percentage contributed by the agriculture sector is very limited,” he said.

Other changes in the tax law that affect businesses include an increase in taxes for banks that are now required to pay a 35 percent tax, up from 30 percent. For other businesses and partly owned government entities, tax has increased from 14 percent to 20 percent. Meanwhile sectors such as the industrial and telecommunications sectors will continue to pay the same tax rate as they did under the previous law.

While some sectors will likely complain about having to pay more tax under the new law, Abu Saleek doesn’t believe it will have a significantly detrimental effect on business. “The income tax is not the main reason for increasing or decreasing business activities,” he told Venture. “The main thing attracting investors is infrastructure, the ease of doing business, and getting credit.”

Targeting Tax Dodgers

One of the main problems resulting in the lack of revenue generated for the government by the Income Tax Law is the issue of tax avoidance and tax evasion. The government, however, hopes that new harsher penalties will tackle this issue. Now if offenders are caught evading between JD50,000 to JD100,000 the penalty is imprisonment from four months up to one year, in addition to the payment of their tax. In the case of tax evasion above JD100,000 offenders can expect a prison term above one year.

In addition to increasing penalties, the new law has also introduced a system of using invoices to back up claims of expenses through which tax exemptions are provided. A statement from the Tax Department provided to Venture said this was one of the reasons for amending the tax law. By encouraging citizens to use invoices and bills received from the likes of shops, lawyers, doctors, schools, and landlords, they hope this will reduce tax evasion. Abu Saleek likewise believes that it will help tackle this issue that has long plagued the government. “The invoicing method will enable the Tax Department to catch those who aren’t paying their taxes as the invoices will indicate new registers that they didn’t know about before,” he said.

The reality of income tax in Jordan is that few people are actually paying it. This is partly due to the low wages of most Jordanians, which means that a large percentage of the population is exempt from income tax as they fall below the tax-free threshold. The Identity Center, a Jordanian development think-tank, estimates the level of Jordanians subject to taxation on personal income sits at 5 to 10 percent. However, tax evasion and tax avoidance reduces this amount even further. The IMF estimates the actual percentage of the population paying tax could be as low as 3 percent. According to the government, this tax evasion is costing Jordan an estimated JD800 million a year.

While the government appears confident that the new law will raise their revenue through the re-structuring of income tax obligations and through the introduction of harsher penalties for non-compliance, not everyone agrees that this will work. Economist Yusuf Mansur believes that while the new law increases taxation it hasn’t actually improved tax administration, which he says is where the problem lies. “It doesn’t improve the collection of taxes. Fines and penalties will increase corruption and it will give more power to auditors,” he said, adding that enforcing the new law is going to prove challenging for the government.

To compensate for the lack of revenue derived from income tax, the government maintains a high level of value added taxes (VAT) on goods and services. According to Mansur, almost 50 percent of government taxes come from sales tax, whereas income taxes generate only around 20 percent of total tax revenues.

With such high rates of VAT taxes on goods and services it is little wonder that Jordanians are reluctant to pay income tax as well. According to Mansur, there are approximately 123 different types of VAT taxes and fees in Jordan. He believes the level of service Jordanians get back in return for these taxes acts as a further disincentive to pay. “In Jordan the black economy is growing—people are not registering [their businesses] because they don’t get any benefit from the government. All you do is end up paying taxes,” he said, adding that there are no government subsidies and that banks don’t lend to small enterprises.

Mansur believes that even the services that the government does provide are so poor that people are increasingly turning towards the private sector. “Where people can afford it they opt to use private services such as for education and medical [services],” he said, adding that because of the unreliability of government services people resent having to pay taxes for them. As a result, Mansur believes that despite an increase in penalties, without improving the incentives, Jordanians will continue to evade and avoid paying taxes.

Snapshot of the New Tax Law:

What does it mean for individuals?

– A tax free threshold of JD12,000 for individuals, the same as the previous law.

– A further JD4,000 exemption is also added if supported by invoices of expenses related to medical services, and interest paid on housing loans.

– 7 percent tax for the first JD10,000 above the exempted JD12,000. In the previous law, the first JD12,000, after the exempted amount, was subject to a 7 percent tax.

– Under the new law, a second bracket has been created with the second JD10,000 subject to a 14 percent tax. There will further be a 20 percent tax for individuals who earn above this.

– This is compared to the previous tax law, which entailed a tax of 14 percent on any sum above the first taxed JD12,000.

– The new law provides a tax free threshold of JD24,000 for a household’s combined annual income, plus the JD4,000 exemptions on expenses related to medical services and interest paid on housing loans.

What does it mean for businesses?

– Banks: 35 percent income tax (up from 30 percent)

– Industrial sector: 14 percent levy on every JD100,000 generated, which rises to 20 percent on every JD1 above that amount. (The same as the previous law)

– Telecommunications, electricity distribution, mining, insurance, brokerage, finance and companies or persons who provide rental and leasing services: 24 percent tax on every JD1 earned

 Agriculture: Totally exempt from tax (Previously 14 percent tax after the first JD75,000)

– Other businesses and partly owned government entities: 20 percent tax (up from 14 percent tax)