1. BAITULMAL (TAXATION IN ISLAM)
Topic 12:
BAITULMAL (TAXATION IN ISLAM)

2. Introduction
It is quite essential to recognize major Characteristics of the Islamic Fiscal System before dealing with Taxation , Expenditure and Public Debt in an Islamic Economy

3. THE ISLAMIC FISCAL SYSTEM Non-Zakat Revenues and Expenditure
Functions of the Islamic Fiscal System
1.Collection and distribution of
the Islamic fiscal Duty: Zakat
2.Collection and employment of
Non-Zakat revenues: Taxes and other
State revenues.
3.Control and Management of
Public Property and Resources.
4. Provision and development
of Public services and utilities.
5.Employment of Fiscal tools when
necessary for purposes
of public interest.
6. Estimating need for
Public Borrowing
If necessary and
Management of Public Debt.
THE ISLAMIC
FISCAL SYSTEM
FUNCTIONS
CORE
Non-Zakat
Revenues
and
Expenditure
Zakat
Collection
And
Distribution

4. Public Expenditure Public Revenues
Budget
Public
Revenues
Zakat
Revenues
Collection
according to
Sunnah Rules
Zakat
Distribution
According to
Quranic Rules
Non-Zakat
Revenues
(Taxes and other)
Collection
according to
Shariah and
Ijtehad
Expenditure
according to
Shariah and
Ijtehad

5. of the Islamic fiscal system
Shariah and its intents
Targets
of the Islamic fiscal system
Islamic Ideology
Public Interest
Socio-economic
justice

6. Public Interest and Socio-Economic Justice
Public Interest is inseparable from the Islamic conception of socio-economic justice .
Public interest should be guided by Ijtehad within boundaries of Islamic Shariah and its intents.
Socio-Economic Justice Requires:
Fair collection of Zakat, and other duties that may be levied, in accordance to Sunnah and Ijtehad.
Fair allocation of Zakat revenue among the categories which the Quran specifies.
Observing and giving priority, within Shariah, to the interests of the majority of population through public expenditure policies.
Management of public ownership resources in a manner which maintains a just pattern of income and wealth distribution in society.

7. The Role of TAXATION

8. Historical View
Only Zakat (the Islamic Fiscal Duty ) was collected from Muslims and no Taxes were imposed on them in the early centuries of the Islamic State. Taxes were only imposed on non-Muslims because they were not committed to Zakat.
Historical experience reveals that Zakat revenue was in some periods more than sufficient in covering public expenditure, and in other periods insufficient.

9. History: “Jizyah” and “Kharaj”
Jizyah was a poll tax imposed on non-Muslim people living in the Islamic state, because these were neither paying Zakat nor serving in the army like Muslim citizens.
Kharaj was a tax levied on arable land owned by non- Muslims in provinces conquered and ruled by the Islamic State.
Kharaj was firstly introduced by the Caliph Umar ibn Al- Khatab after conquering rich agricultural countries such as Iraq, and Egypt.

10. Caliph Umar ’s view was that distributing conquered arable land among Muslims who achieved the conquest was bound to concentrate wealth in their hands, whereas Kharaj revenues paid by the indigenous owners of the conquered land, would in the long run be much beneficial to ordinary citizens living in the Islamic State .
It should be noticed that Muslims landowners, who lived in countries, that by virtue of their conquest joined the Islamic State, paid only Zakat (5%-10% in case of Agricultural products) which carried a much lower rate of taxation than Kharaj.

11. During the Umayyad period, a question was raised with respect to treatment of Kharaj land when leased to Muslims? Should it pay Kharaj or Zakat?
Umar II (Umar ibn abdel-Aziz) ruled out that land from which kharaj was paid could not be transferred to Muslims, who could lease such land, but in that case, they would be required to pay kharaj.
Under the Abbasids and thereafter the mass conversion of Christians and other non-Muslims to Islam eroded the Kharaj (tax) base of the Islamic State.

12. History: Ushr
A Tax initiated by Caliph Umar ibn al Khatab and was, levied on merchandise brought from outside, once its value reaches Nisab.
To Muslims, rate of this Tax was equal to Zakat on trade, i.e. 2.5% on value. Ushr (Zakat) had to be paid to the Asher (Collector of Ushr) on the instant of coming with merchandize from outside.
To Christians and the Jews (People of the Holy Book) Ushr was 5% (i.e. double that of Zakat)
To Other Merchants coming from countries that were hostile to the Islamic State دار الحرب , Ushr was 10% or equal to rate (s) imposed by these countries on Muslims entering their land with merchandise.

13. Taxation: Defence and Other Purposes
During the Crusades’ military campaigns against Middle Eastern Muslim countries in the 11th - 13th AD Centuries, Muslim Fuqaha issued fatwa pronouncing Shariah permissibility of collecting taxes from Muslims for purposes of Defence.
This fatwa was justifiable by shortage of Public Revenues that were available for defence.
The Rulers in the late period of the Abbasside State as well as during the Ottoman State imposed other Taxes on their subjects( Muslims and non-Muslims) to strengthen the armies as well as to cover expenses of their lavish style of living.
Taxation became quite burdensome in some periods to the extent of hindering development. (Quote Ibn Khaldun)

14. TAXATION IN A CONTEMPORARY ISLAMIC ECONOMY
Taxation, in Principle, is acceptable within an Islamic economy.
The Role of Zakat as an Islamic tax is fundamental.
Zakat should be the heart of any proposed modern Islamic Tax System.
Yet, philosophy, targets, and Characters of Zakat as an Islamic Tax should be clearly distinguished.
Rules for Taxes that could be imposed besides Zakat within an Islamic Tax System should be high lightened.

15. Principle of Taxation
Taxation is accepted in all civilized (or democratic) societies as a fundamental element in the social contract between Ruler and citizens.
The Quran reports a version of a “social contract” in Sura 18:94 : People living under the continuous threat of some foreign invaders (Yajuj and Majuj), expressed to the new ruler (Dhul Qarnain) their readiness to pay for him Kharaj (tax) if he erects a barrier (Wall) which would protect them against those enemies.
The ruler (Dhul Qarnain) concluded this social contract with people on condition that they would help him in all efforts needed for building the barrier.

16. ZAKAH
Definition
Zakat- obligation disbursement on wealth and earnings above a certain limit in accordance to a certain regulations and procedures to be given to a certain group of people.
Types of zakat:zakat fitrah & zakat property
The eight beneficiaries: Fakir,miskin,amil,Muallaf,Slave,Debtor,Jihad fi sabilillah, Ibn Sabil.

17. Cont… The positive impacts:
Promote the distribution and redistribution of wealth and income.
Decrease the economic gap in the society.
Sustainable economic stability
Encourage the productivity.
Create the job opportunities
Increase the purchasing power of low income group.

18. Cont…
It is built-in instrument that exist within the framework of Islam to provide:-
social security
eradicating poverty
curbing excessive economic disparities
stimulating economic activity by transferring substantial purchasing power to have-nots

19. Zakat is the Heart of the Islamic Tax System
Nothing can be said about Taxation in an Islamic system without firstly knowing the nature and role of the Zakat system.
We have to recognize similarities and differences between Taxes and Zakat.
This is important particularly to those who have objections at calling Zakat “an Islamic Tax”
It is also important because any tax that may be imposed besides Zakat should be guided by the basic principles of the Zakat System and should not contradict or duplicate Zakat.

20. Just like taxes, Zakat strictly speaking is neither voluntary payment nor a donation and should be collected and distributed by the State (though it could be given directly to its recipients without government intermediation). In Shariah a central treasury ( Beitu-almal) is trusted to collect it annually. In recent times, Pakistan, Sudan, and Saudi Arabia have enacted legislation to enforce the Zakat.
Zakat unlike taxes which are imposed and enforced through man-made legislations. Zakat is a duty commanded by Allah as part and parcel of religion and, in principle, is a personal exercise intended to purify human soul.
The religious aspect of Zakat establishes differences with Secular Taxes in three major areas, namely Tax burden, Tax avoidance and Tax evasion: >>

21. (a) Tax burden; Tax imposed on producers and sellers is considered part of their costs and a burden which could possibly be transferred to consumers through market mechanism ( depending on elasticity of demand and supply). This is quite different from Zakat, whose payer consider it a religious duty and never a burden and therefore should not be transferred on other people.
(b) Tax avoidance; which is utilization of the tax regime by means that are still within the law (or by exploitation of lope holes in the law,) to one's own advantage in order to minimize the amount of payable tax. A Muslim who knows that he is paying Zakat by order of Allah SW will never do this. On the contrary A believer is normally pleased when his income and wealth are increasing and hence would be paying more Zakat.
(c) Tax evasion; is the general term for efforts by individuals and other entities to evade taxes by illegal means, and this can never be done by any believer.

22. Based on the Islamic conception of justice Only Muslims having Nisab (a set level of income or wealth; money and real assets) are obliged to pay Zakat. On the other hand Zakat revenues are distributed among several categories, with special preference or priority given to the society’s poor and the needy groups.
In most contemporary democratic and developed societies Taxation would, to one degree or another, have socio-economic justice amongst its targets. Yet, no special right or priority in Tax revenues is necessarily given to low income groups as in Zakat.
On the other hand, historically as well as in non- democratic and developing societies socio- economic justice is often missing.

23. Historically in non-Islamic societies, e. g
Historically in non-Islamic societies, e.g. in medieval feudal Europe taxes were collected from ordinary folks in favour of the Nobility and rich landlords.
In non-democratic and developing societies taxation is a source of injustice. Taxation imposes more burden on low and middle income groups , e.g. through taxes of regressive rates and through ability of the politicians and rich people to evade taxes by means of corruption.

24. The Islamic system of Zakat enjoys a permanent and stable character
The Islamic system of Zakat enjoys a permanent and stable character. This is unlike secular Taxation where a Tax may be removed or added and its rate is subject to adjustment by Legislators .
Whereas Tax rates may be excessively progressive to the extent that they discourage individuals or firms to produce more and earn more income, or may be regressive to the disadvantages of low income groups, Zakat rates are proportional and can be generally described as low or relatively quite moderate when compared with tax rates.

25. The Economic Role of Zakat
Zakat which is the core of the Islamic Taxation System has three major Economic Effects :
(a) Distribution Effect,
(b) Income Effect, and
(c) Growth Effect.

26. (a) Distribution Effect
Zakat is collected annually from rich people’s income and wealth and is distributed amongst the poor and needy and other groups which normally need financial support (wayfarer and heavily indebted people). Zakat, therefore, plays a regular and active role in re-distribution of National income and wealth in favour of lower income groups.

27. (b) Income Effect
Private spending of Zakat by recipients whose marginal propensity of consumption is normally high has a direct effect on aggregate demand and National income in the short run. Besides, regular public spending of Zakat on some major items, e.g. National defence has also its direct affect on National income.

28. (c) Growth Effect
Zakat spending on poor and needy should partially be assigned for investment. This kind of investment is necessary for poverty elimination and human resource development in the long run. The larger is Zakat spending that is devoted to investment every year the greater will be the effect of Zakat on growth.

29. Islamic Taxation
The need for imposing Taxes besides Zakat could arise for several reasons.
Public Interest within boundaries of Shariah and its intents المصالح الراجحة may render Taxation necessary for fiscal, economic or non- economic purposes.
Laying Rules for Islamic Taxation is therefore an essential and important task.
The Role of Taxes in an Islamic Economy would naturally be linked and influenced by ethical and Shariah constraints imposed on taxation.

30. Principles and Rules for Islamic Taxation
A Tax should not be levied, for any reason, by an Islamic government except after intensive consultation شورى with eminent Fuqaha and Muslim experts in fiscal and economic matters.
Any proposed Taxation should not duplicate Zakat of any type. For example a Tax imposed to provide sustenance to the poor people or to subsidize their necessities would duplicate Zakat : >>

31. Zakat should specifically fulfil this target
Zakat should specifically fulfil this target. In Hadith; “ Allah SW has imposed on rich people a duty (Zakat) to be paid from their amwal (i.e. wealth and income), and this would suffice poor people. If the poor in society should ever face hunger or clothing insufficiency, it would only be due to rich people not fulfilling their duties”.

32. 3. Any proposed Taxation should not contradict the basic principles of the Zakat System. For example no tax should be imposed on low income people or on orphans wealth, or levied at a rate that involves injustice because of its regressive or progressive nature. Taxes should therefore complement and not contradict the Zakat System.

33. 4. A Tax, should never carry or assume the same obligatory and permanent nature of Zakat. A Tax which would be originated for purpose of achieving a given fiscal or economic target (that could not be done by Zakat) has to be removed once this target is done.
ليس فى المال حق سوى الزكاة بمعنى ليس ثمة حق ثابت دائم
Otherwise taxation would entail a sinful bedaa بدعة (origination of idea or action that changes religion) and injustice..

34. 5.Taxation with respect to Non-Muslims
All previous principles of taxation are applicable to Muslims. The case of Taxation with respect to Non- Muslims requires different treatment.
Non-Muslims will necessarily be subject to taxation because Zakat is not collected from them.
Islamic Shariah provides for treatment of Non- Muslims within framework of Justice and Society’s Public Interest.
Taxes imposed on Non-Muslims in our time have to take into consideration their role in the Islamic economy, benefits they draw from public utilities, their ability to pay and their socio-political obligations.
Full citizenship of Christians in some contemporary Muslim societies may call for equal fiscal treatment with Muslims.

35. Examples of Taxes and their Role within an Islamic Economy
First: Taxation against Zakat avoidance
Collection of Zakat by a Central or Local Governmental authorities in our time is not expected to run smoothly as in early days of Islam.
A percentage of Muslims, whose Islamic culture or belief is not profound are bound to avoid Zakat payment by misusing Shariah rules.
Taxation can play a definite preventive role to stop or minimize Zakat avoidance in contemporary Muslim Societies. Collection of full Zakat revenues is quite important particularly for categories which are classified as poor or ultra poor in the society

36. Second: Taxation for Macro-Economic Adjustment
In a contemporary Islamic economy Taxation can be used within boundaries of Shariah and its intents, to affect or modify macro-economic variables.
For example at times of inflation taxation can be used to reduce Aggregate Expenditure by imposing taxes on luxurious consumption.
Taxation is also needed to modify the structure of production if resources are allocated in a pattern which is unfavourable to goods and services needed for poor and low middle income groups, or in a pattern that is unfavourable to economic development. These are, in fact, important issues for all developing Muslim countries.

37. Third: Taxes against harmful consumption
Taxes can be levied to discourage any kind of consumption or activity that may be potentially harmful to human health or to Islamic ethical values. (لاضرر ولا ضرار)
Consensus of Muslim Fuqaha is always needed before issuing fatwa (Shariah pronouncement) that a new kind of consumption X or Z is definitely harmful and therefore should be prohibited (i.e. Haram).
Whereas Consensus is often difficult to reach and Fatwa is delayed, harm of X or Z has manifested practically in some cases, and potentially is expected to spread and becomes serious.
Examples: heavy taxes that can be imposed on tobacco smoking, or on some types of undesirable entertainment.

38. Fourth: Taxes against Pollution
Islamic jurisprudence has rules against water and air pollution since the early centuries of Islam.
The problem of water and air pollution has become so serious in our time and all the world is seeking a cleaner and healthy environment.
Taxation of all activities which cause air or water pollution is economically better solution than closing these activities. Taxation should sooner or later encourage these activities to take all necessary technical measures that would stop pollution.