Food producers and importers are worried about the impact recent tax rises will have on their sector.
Tax revenues are growing at a slower rate than the GDP and that means trouble for the Jordanian economy. Public debt has exceeded 95 percent of the GDP and current expenditure reached over JD7 billion in 2017, marking a JD178 million increase compared with 2016.
The tax-to-GDP ratio also dropped by 4.5 percent in part because of tax exemptions and the reduction of customs tariffs and general sales tax rates. In response, the cabinet introduced a controversial package of IMF-guided tax hikes earlier last month to lower the record high public debt in time and generate at least JD540 million in extra revenues.
The package consists of a structural reform program which affects every aspect of Jordan’s economy. It removes exemptions on the general sales tax, an invoice-based consumption tax that’s collected in pieces along the construction chain by sellers and paid to the government.
The removal unifies low 0 to 4 percent tax rates on a large number of items at 10 percent while leaving it at the 16 percent ceiling for others. This tax is one of the most important pieces in the federal tax picture and although government officials say implementing this reform is critical, several economists have objected, arguing that increasing taxes will actually cause a stifling effect on the movement of the economy and its size.
Jawad Anani, chairman of the board for the ASE and previous minister of labor and state for cabinet affairs, argued that people are already overtaxed and the government has already taken too much. The emphasis should not be on enhancing government revenues but on increasing the purchasing power of individuals to stimulate growth and decrease the ratio of debt to GDP, he said.
Director of the Phenix Center for Economic and Informatics, Ahmad Awad, echoed similar concerns. In a recent policy paper on the tax system in Jordan, Awad said: “The indirect tax is unfair because the poor, the unemployed, the rich, and middle-class all pay the same percentage when they purchase goods and services … I think one of the significant key solutions [is] the government should review the tax policies and develop a fair tax system. Without that we will conclude one economic crisis only to enter into another.”
Foodstuff Sector Feels the Impact
The cabinet’s decision has hit food prices hard. Consumers in the low and middle class were heavily affected when the general sales tax increased by 6 or 10 percent on over 100 tariff items, said Khalil Al-Hajj Tawfiq, chairman of the General Association for Foodstuffs Merchants. This decision has had a significant impact on local merchants, workers, and businesses that are “just surviving,” he added.
The highest tax increase was on wide-used commodities like vegetables and fruits. Six vegetable items that are widely consumed like tomatoes, potatoes and onions spiked from a 0 to 10 percent general sales tax. The package raised other food items like most dairy products, processed food, pasta, herbs, salt, and chilled meat from 4 to 10 percent.
According to The Jordan Times, Jordanians will have to spend a minimum 10 to 15 percent of their income to maintain the level of living standards they had before the increases in taxes and ending of bread subsidies. In response, Jordanians have been demonstrating their growing resentment across the Kingdom over recent weeks.
“The purchasing power of the consumer will decrease by the same percentage as the tax increase. Sales and transactions have already dropped by as much as 25 percent in many markets,” said Tawfiq.
As the chairman of the union, he listens to the complaints of 13,000 company members in the association. Whenever the general sales tax increased, there was a direct impact on the retail price as well. In effect, the consumer spending habit will predictably decline, he explained.
Nabil Khoury, the general manager of Sweilem Import Export Establishment, has been importing food and non-food items from the United States, Thailand, Europe, and throughout the Middle East for more than 20 years. Over the last couple of years his company has been struggling as a result of the stacking tax hikes.
Importing a $20,000 container this January cost him JD935.80 more than it did when importing the same container in February of last year. And the 5 percent increase in customs tax implemented last year multiplied by the general sales tax increase this year equals dangerously high prices that are too stressful to maintain.
“When prices increase, businesses take a hit and we all lose,” he said.
Products that have had their general sales tax adjusted from 4 to 10 percent, which are the majority of the items, affect the market price by 7 percent and “if the item is $3, consumers will end up paying $3.20, if it’s $5, they’ll pay $5.35,” he said. Instead of raising the retail price of his products, Khoury is trying to absorb as much of the tax raise as he can, which could mean lowering worker wages or letting employees go altogether; doing whatever needs to be done to keep the business alive.
“I’m giving the minimum I can which is the maximum I can,” Khoury said. “We’re surviving; that’s all I’m doing right now and if I see in a couple of years that I’m not making money but losing then I’m going to end up doing something drastic.”
And Khoury’s not alone. As it becomes more expensive to import and sell, companies in the foodstuff sector will need to make adjustments to survive in the coming months. Many small and medium size companies will have no choice but to cut pay and let staff members go, and even then that might not be enough.
Khoury has already begun cutting the number of items he imports and sells. He used to import and sell honey but after the government raised the general sales tax on this particular item from 0 percent to the ceiling limit of 16 percent in one adjustment, it became too costly. “It’s just becoming very difficult for importers and retail to consume all of this. We had a hard time selling as it was without all these charges,” he said. “Some of it is not justified, some of it could be. They may have had some wrong value added taxes on some items but some items shouldn’t be affected as much as they were.”