TAXATION. Islam makes specific provision for taxation, the payment of which is viewed as a religious duty. The most important tax is zakdt, a tax based on wealth, which is paid annually at a rate of one-fortieth of the value of personal or business liquid assets. Property and equipment are excluded, but cash holdings and inventories are subject to the tax at the standard rate of 2.5 percent.
There has been considerable debate among Islamic economists and lawyers about what assets are “zakatable,” given the changes in the nature and range of economic activity since the time of the Prophet. The type of tax structure which is appropriate for agricultural economies with only simple trading businesses is clearly rather different from one which is suitable for industrializing economies with businesses organized on a corporate basis. It is only during the past decade that Islamic scholars have addressed modern accounting issues, and there remains much work to be done in this field.
There is general agreement that the income from asset disposals should be subject to zakdt, although there is some debate whether it is the disposable income at the end of the accounting period which matters or the income as it accrues. The treatment of debt has also been considered in detail. Debt is allowable against zakat, but what counts as debt is not always a simple matter, as there are many forms of business liability.
Zakat is a transfer payment, as it is designed to be paid by those with surplus liquid wealth for the benefit of the poor and needy. The essential purpose is redistribution, and the funds raised are earmarked for social and humanitarian spending. The proceeds cannot merely be paid into the treasury and used to finance such commitments as expenditure on defense or even infrastructure investment. The collection is usually organized separately from other taxes, with a religious ministry involved. The receipts are often not even counted with fiscal revenue, and balances are accounted for independently.
Although there have been some Muslim economists who have suggested that zakdt could be used as an instrument of demand management, there is a general consensus that this would conflict with the social objectives of the tax. However it can be argued that there are more needy people in a recession, so zakat expenditure should be increased, and in a boom period, receipts will be higher. Running surpluses with zakat funds and borrowing to cover deficits raises other problems, including that of ribs (interest earnings and payments). This is of course unacceptable from the Islamic point of view. Zakat is in any case a wealth rather than an income tax, so its suitability for Keynesian short-term demand management must be open to question, even when considered from a narrow economic perspective.
The issue of whether taxation should be limited to zakat obligations has been debated since the time of the Prophet by Muslim scholars. In the early years of Islam, a tax called jizyah was imposed on non-Muslims. This was justified on the grounds that non-Muslims did not pay zakdt, yet they received government protection if they resided in a Muslim state. Jizyah was not therefore a punishment on the conquered who refused to convert to Islam, rather it was to ensure that all residents of an Islamic state contributed to its maintenance on a nondiscriminatory basis.
Unlike zakat, the Islamic land tax (kharaj) is applied to both Muslims and non-Muslims. The tax is levied according to the acreage of the land, but the rate depends on the output potential. Higher rates apply on irrigated lands, better soils, and fields suitable for higher-value crops. The maximum rate is half the value of the crop. In the event of crop failure owing to climatic factors, the tax is not applied. If low yields are the result of negligence, then the owner will still be obliged to pay. In such circumstances the land may be sold to another farmer, who, it is hoped, will make better use of it. Kharaj means that landowners have a responsibility to use their land effectively and realize its potential, as land is a gift from God and should not be wasted.
In the Ottoman Empire land taxes were a major source of state revenue, and all land was registered so that an accurate assessment could be made. This land registration proved very useful, as uncertainties were removed about boundary demarcation, and the security of tenure with land title encouraged productive investment by landowners in irrigation and other farm improvements. State-owned land was auctioned to private operators under the muqatta’ah system, with successful bidders given the right to farm the land for a three-year period. This system was extended to mining, the minting of coinage, and even the collection of customs revenue. This franchising out to private operators of former government-run activities resembled in many respects the privatization methods increasingly adopted by Western governments.
In the nineteenth century the European imperial powers tended to undermine traditional Islamic methods of tax collection. Secular taxes were introduced as Ottoman control weakened, customs duties being a major source of revenue. Income tax was also introduced in many parts of the Islamic world, although this never proved popular, and in practice often only government employees paid the tax. In such countries as Iran tax evasion was widespread under the secular regimes of the shahs, although zakat was administered independently by the mullahs through the mosques. There were frequent attempts at government interference, but these were resisted by the clerics, who had little faith in state social-welfare provision.
Recent years have witnessed a resurgence of interest in Islamic taxation. In Saudi Arabia zakat is the main form of taxation, and although contributions are voluntary, most Muslims willingly pay. In Sudan most domestic social-welfare expenditure is financed from zakat funds, the government spending most of its unearmarked budget on military commitments. In Pakistan Islamic taxation is increasingly important, although much remains to be done if the economic system is to be islamized as the government appears to want.
As with Islamic banking, zakat in most Muslim countries exists in parallel with conventional tax structures.
The latter often function ineffectively owing to the reluctance of businesses and individuals to pay. There is little doubt that Islamic taxation could aid development, as the faithful are more than willing to contribute. Zakat and other Islamic taxes can effectively widen the tax base, harnessing hoarded funds in the interests of development, and because the revenue is earmarked, it is likely to improve social welfare rather than procure armaments.
[See also Economics, article on Economic Theory; Jizyah; Kharaj; Property; Zakat.]
BIBLIOGRAPHY
Abdul Mannan, Muhammad. Abstracts of Researches in Islamic Economics. Jeddah, 1984. Summary of important work on taxation by Muslim economists in the 1970s and early 1980s.
Abdul Mannan, Muhammad. Islamic Economics: Theory and Practice. Cambridge, 1986. Examines tax structures in the early Islamic period, including taxes on non-Muslims and land taxes.
Chapra, Mohammad Umer. Islam and the Economic Challenge. Leicester, 1992. Considers zakay income distribution, and economic development.
Chapra, Mohammed Umer. “Reforming the Public Finances in Muslim Countries to Realise Growth with Equity.” In Financing Economic Development: Islamic and Mainstream Approaches, edited by A. M. Sadeq, pp. 125-141. Kuala Lumpur, 1992. Applies Islamic thinking on public finance, using a Western framework.
Kahf, Monzer. “Fiscal and Monetary Policies in an Islamic Economy.” In Monetary and Fiscal Economics of Islam, edited by Mohammad Ariff, pp. 125-137. Jeddah, 1982. Concise outline of Islamic taxation for those with some knowledge of public finance. Kahf, Monzer. “Zakat: Unresolved Issues in Contemporary fiqh.” In Development and Finance in Islam, edited by A. M. Sadeq et al., pp. 173-190. Selangor, 1991. Considers some of the debates among modern writers on Islamic taxation.
Morad, Munir. “Current Thought on Islamic Taxation: A Critical Synthesis.” In Islamic Lain and Finance, edited by Chibli Mallat, pp. 117-127. London, 1988. A rather personal view which tries to bring together the different strands of thought on Islamic taxation. Nienhaus, Volker. “Les biens public et la politique financiere dans une economie islamique.” In Les capitaux de l’Islam, edited by Gilbert Beauge, pp. 123-134. Paris, 1990. Excellent French-language summary of the essentials of Islamic public finance.
Tabakoglu, Ahmed. “Role of Finance in Development: The Ottoman Experience.” In Proceedings of the Third International Conference on Islamic Economics, edited by A. H. Ajunaid, pp. 2-16. Kuala Lumpur, 1992. Useful account of nineteenth-century Ottoman tax structures.
Wilson, Rodney. “Macroeconomic Policy and the Islamic State.” Chapter seven of the author’s study Islamic Business: Theory and Practice. London, 1985. Examines fiscal policy objectives and the role of zakat as a wealth tax.
RODNEY WILSON