Umm Sulaim's Thoughts

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TAX: Islamic Finance 4.0

TAX - Islamic Finance 4.0

The Barack Obama Administration has just finalised a deal with a majority of Democrats and Republicans in the US Congress that halts an income tax increase on working- and middle-class families; a pat on the back for everyone including the citizens some of whom for weeks have been cynical about falling off the fiscal cliff, albeit all on their own.


Does income tax or any other tax have a place in Islam?  For one, if income tax were prescribed in Islam, it would not be a negotiable civil liberty.  Mandatory income tax in any form is not directly associated with the practices of the Messenger of Allah and the leadership of the Four Rightly Guided Khaliphs, Abu Bakr, Umar, Uthman and Ali.


In the succeeding years after the leadership of these eminent men, Muslims were sometimes obliged to pay taxes for various reasons including to finance the defence of the Muslim State.  The imposition of these taxes was frequently opposed by erudite Ulema who saw the move as an unnecessary burden on hardworking citizens, considering the extravagances of the incumbent king.


Some western speculators have long suggested that Muslim nations need to impose a western-style tax system on its citizens to furnish the populace with a voice in governance.  How much voice did American citizens have in the impasse at the US Congress?  Despite enormous support for the middle-class tax-cut, a good number of Republicans obstructed the bill until the very last minute.


Rather, payment of income taxes – and the other forms of taxes – is a means of revenue-generation for the State regardless of whether the government is people-oriented or not.  How do Muslim nations generate revenue? What are the means of revenue generation set by Islam?


The response for the last question is easy: Zakah, a yearly investment deductible of 2.5% from savings and certain property that reach the minimum amount from which Zakah must be extracted.  The precise rates on property and business depends on the value of the property.  Property here is not limited to the normal perception, i.e. land and real estate, but includes agricultural yields, which in lay man’s terms can be described as livestock, cash crops and grains.


I have chosen to define Zakah as an investment rather than a tax, as the latter is a task and a burden, but the former is a purification and an asset, the fruit of which is earned in this world and the next.


Muslim nations have different tax rates.  A study case is Saudi Arabia, which has a zero personal, or employment income tax on its residents, with personal income tax for non-residents and corporate tax at approximately 20%.


Higher corporate income tax of between 30% and 85%, depending on cumulative yield, are payable by companies involved in natural gas, with 85% payable by oil companies.  In addition, Zakah of 2.5% is applicable to all categories of companies whether foreign-own or belonging to a GCC national.


Instead of income tax, Saudi residents pay the Zakah rates, the same rates applied to nationals of the other Gulf Cooperation Council (GCC) States of Bahrain, Kuwait, Oman, Qatar, the United Arab Emirates.


These income taxes are payable in instalments within a fiscal year, and during an extended period of 120 days after the end of that particular fiscal year.  Zakah is payable on profits from previous fiscal years and on one-year old savings, but increments to savings during the fiscal year are excluded.


Saudis, however, do pay business or professional service income tax of 20%.  Similar to the social security structure of some western nations, there is a social security contribution against disability, old age and death.  Employees, with the exception of civil servants, farmers, domestic staff, as well as employers, make a social security payment of 9% of their income.  The exempted categories of earners have the option of enrolling into the social security program.


It is common to hear Muslims quote the position of their ‘shaykhs’ concerning production and industry as “All I know is Qaala RasuuluLlah”.  These are quasi ‘shaykhs’ who lack thought and foresight – nor hindsight, for that matter – and regurgitate the magnificent words of the Messenger of Allah without comprehending the applications of Islam in present times.


Others hold that industry cannot be incorporated into Islam as they are founded on unIslamic practices.  I ask: Are Muslims so intellectually redundant as to be unable to refine business practices with an Islamic perspective?


If, for instance, the needs of the consumers are neglected or if consumers are offered poor quality products, consumers can always issue a vote of no confidence with their money and their feet.


Personally, rudeness is a valid certificate that nullifies my patronage of any business.  This practice has become my trademark, so much that once a retailer is discourteous, he is aware that “She will not come here again”.


Wherever there are enlightened consumers, there are consumer-watch organisations that look out for the needs of consumers in that nation.  Can Muslims be so informed as to assert their grievances without riots, demonstrations, sentimental campaigns or the usual gossip and rumour remedy?


Perhaps, if they believe they have rights.  I do not mean the superficial rights against non-Muslims or Muslims whose assertiveness they hold in contempt, but legitimate rights that are both applicable and valid in all situations.


This distinction is necessary, as Muslims deny the existence of their rights and those of others within Islam, but readily assert rights at moments of convenience, particularly when those rights have the support of non-Muslim legal system.


The legal system adopted by Muslim nations towards revenue generation or business guidelines need not be a carbon copy of western policies.  Consumer-focussed corporate and infrastructural investment is the solid key to revenue generation and economic growth.  The magic formula of oil revenue may be appropriate for the short-term.


Retrospection informs there were several centuries before oil exploration during which the Muslim world excelled in industry and science at a time the West was in the Dark Ages.


One comment on “TAX: Islamic Finance 4.0

  1. Pingback: BANKING | Securing Your Deposits | Umm Sulaim's Thoughts

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