Islamic Case Study: Zakah alleviating poverty through tax rebate

Islamic Case Study: Zakah alleviating poverty through tax rebate

by Dr. Magda Ismail & Buerhan Saiti

From a mere glance at Muslim countries today, we realize that they are classified as third world countries even though they are adopting a secular system. The recent statistical data of 2009 shows that the majority of people who live below poverty are found in Muslim countries such as; Afghanistan 53%, Eritrea 50%, Yemen 45%, Bangladesh 45%, Sudan 40%, Pakistan 24%, Algeria 23%, Egypt 20%, Turkey 20%, and Indonesia 18%.  Some scholars related this fact to the oppression, humiliation and the bad policies which had been imposed to almost all Muslim countries during colonization and which continued up to the present time.  Others related this to the incompetence and the corruption on the part of their governments. We cannot deny the above mentioned reasons as the catalyst for the spread of poverty in the Islamic world and the recent uprisings. However, we believe that the main reason impeding Muslims themselves is the neglect exhibited towards their Islamic institutions forgetting the advice of the Prophet (pbuh) who said:

 -I have left two things behind me for you (the Ummah). You will never go astray as long as you follow these two things. One of these two things is Allahs Holy Book (the Quran al-Kareem) and the other is the Sunnah of his Most Beloved Prophet (Salla Allahu alaihi wa sallam). (Muwatta Imam Malik)

We strongly believe that it is time for Muslim leaders to replace their current adopted secular institutions with Islamic ones if they seek the welfare of their societies. Malaysia is one of the Muslim countries that realized the importance of not only reviving Islamic institutions but by also putting them into practice.  Even though Malaysia is a multiracial country that include non-Muslims, the good performance of these Islamic institutions in the last few decades, encouraged the non-Muslim population to compete with Muslims in studying such institutions in depth including various Shari'ah aspects. The main objective of this article is to show how Malaysia successfully managed to replace the tax system with the compulsory zakah which helped in reducing the poverty rate from 8% in 2002 to 3.6% in 2010.
ZAKAH OR TAX
Muslim scholars confirmed that the only financial due approved in Islam is zakah and that it is unlawful to violate this rule except in dire needs. They also highlighted restricted conditions for such imposition even during critical needs.  For example Sheikh al-Qardawi in his Fiqh al-Zakah mentioned one incident on this issue saying, -When Sultan Qutuz of Egypt was preparing his troops to fight the Moguls, who by then had occupied most of Syria; he gathered all scholars and judges to consult with them on whether he could impose extra taxes for jihad.  However, Imam Izz al-Din advised him the following; 

If the enemy transgresses on the lands of Islam, all Muslim are obligated to fight. It is then permissible for you to collect taxes from people in the amount that helps you in this jihad, provided there be nothing in the public treasury and that you sell all gold ornamented clothes and all fancy tools and utensils that you and your courtiers and soldiers own, so that each person in the army has only a mare and a weapon, and all become equal to the common people. As for collecting funds from the public while your men and soldiers still have assets and luxurious things, then no, it is not permissible to collect extra taxes.

We realize from the above mentioned incident that even though there are crucial needs to collect extra taxes they have to be restricted to some conditions as the one mentioned above.
ZAKAH, ADMINISTRATION & POVERTY ALLEVIATION
Literally, zakah means blessing, purification, increase and goodness. It is the third pillar of Islam and it is obligatory upon all Muslims to give part of their wealth and assets once it reaches al-nisab/the minimum assigned, on an annual basis or once harvested.  The recipients of zakah are eight categories of people including the poor and the needy as specified in Surat Al-Tauba, (9:60).  One of the main objectives of zakah is to assist the receiver of zakah not only to become an active member in the society but to be giver of zakah the following years.  Hence, only then in this case can zakah alleviate poverty from society. To achieve this, zakah has to be administered by the state as came in al-Quran and as practiced by the Prophet (pbuh), his companions and his successors, for the following reasons: if people have no concern in paying their due obligations then the state will force them to pay their zakah and hence the right of the recipients will not be lost; receiving zakah directly from the state and not from the rich people will preserve the dignity of the recipients from direct humiliation; the state will be responsible to collect zakah from all people who can afford it and to distribute it in a just and even way to the eight categories of the recipients as mentioned in al-Quran; it is the responsibility of the state to create jobs for the poor and the needy and to make them active members in society hence in this way zakahs objective to alleviate poverty will be met.
ZAKAH ON MONTHLY SALARIES  
The majority of people understood that zakah has to be taken only on annual basis. By this limitation the majority of Muslim scholars realized that they are excluding some of the new incomes which did not exist during the early days of Islam.  For example, by excluding the monthly salaries from zakah, the majority of Muslim population will be exempted from paying their compulsory due since they will automatically spend all their salaries on their daily and unnecessary consumption. For this reason contemporary Muslim scholars agreed that income such as salaries, rents, wages, profits and dividend are also subject to zakah. 
This encouraged some Muslim countries to enact laws for the collection of zakah from salaries on compulsory and on voluntary basis.  Among those countries are Sudan and Malaysia. In Sudan, the Sudanese Zakah Law of 1986 gives the right to the government to collect zakah on compulsory basis from all wealth including wages, salaries, professional income, and other forms of earnings. This law also gives the government the right to deduct zakah from all salaries on monthly basis from all Muslims working inside Sudan as well as all Sudanese working overseas. Similarly the Malaysia Tax Law encourages Muslims to pay their zakah but on voluntary basis from their monthly salaries through a Salary Deduction Scheme as shown in the following table.

ZAKAH PAYMENT THROUGH SALARY DEDUCTION SCHEME

Monthly salary	Income tax payment	Zakah Payment	Tax-Rebate
	Considered 1 wife and 1 child	Considered 1 wife and 1 child
2,500	Nil	30.42	--
3,000	Nil	41.92	--
4,000	130	64.92	65.08
5,000	250	87.92	162.08
6,000	424	110.92	322.08
7,000	620	133.92	486.08
8,000	860	156.92	703.08
9,000	1100	179.92	920.08
10,000	1352	202.92	1149.08
11,000	1612	225.92	1386.08
12,000	1872	248.92	1623.08
13,000	2132	271.92	1860.08
14,000	2392	294.92	2097.08
15,000	2652	317.92	2334.08
16,000	2899	340.92	2558.08
17,000	3172	363.92	2808.08
18,000	3432	386.92	3045.08
19,000	3692	409.92	3282.08
20,000	3952	432.92	3519.08
21,000	5460	455.92	5004.08
22,000	5720	478.92	5241.08
23,000	5790	501.92	5288.08
24,000	5980	524.92	5455.08
25,000	6500	547.92	5952.08
Source: Calculated from the Schedule of Monthly Tax Deductions of Malaysian and zakah Calculator provided by the zakah dept. based on one wife and one child.

On line Zakat Calculater for Income

A.	Gross income (per year)		RM
B.	Less Expenses (per year)
	Selves	RM
	Number of wives	RM
	Number of children	RM
	Grant to parents (per year)	RM
	EPF (11% x year)	RM
	Contributions to the charity organization.. Agency list	RM
	Total deduction (B)	RM

For example, a person with one wife and one child earning RM 6,000 a month will pay RM424.00 for his monthly tax.  For the same person, if he chooses to pay his zakah from his monthly salary, he can pay his zakah of RM 110.92 (calculated on an annual basis and after deducting all expenses and divided by 12 months to facilitate payment) and the balance will be his tax rebate.  Even though this scheme is on voluntary basis it encourages almost all Muslims in Malaysia to pay their zakah through tax rebates leaving their net pay unchanged.  Hence, if we assume that the labor force in Malaysia is 10 million Muslims and that the average payment of their zakah is RM100, an amount of RM12 billion which is equivalent to $3.6 billion will be collected within one year, an amount which we believe helped in reducing the poverty rate in Malaysia as mentioned above. 
ZAKAH AND POVERTY ALLEVIATION IN MUSLIM COUNTRIES
The above example encourages us to study the direct effect of the institution of zakah on poverty alleviation in the nine Muslim countries mentioned earlier. If we assume that these nine countries will follow the same Salary Deduction Scheme implemented in Malaysia and that the Muslim labor force in each country has to pay an average amount of $50 on monthly basis for zakah the following amount of zakah will be collected as seen below: Pakistan $33 billion, Afghanistan $9 billion, Indonesia $69 billion, Bangladesh $43billion, Sudan $7.2billion, Yemen $6 billion, Algeria $9 billion, Egypt $24 billion and Turkey $14.4 billion. If well managed and well planned we believe these amounts can alleviate these countries poverty levels within only a few years, without the need for borrowing from the rest of the world.

Country	Population Million	People who live below poverty %	Labor Force (a) Million	Monthly Zakah Payment (b) $	Money collected from  Zakah  (a x b x 12mths) $ billion
Pakistan	175	24	55	50	33
Afghanistan	28	53	15	50	9
Indonesia	245	18	116	50	69
Bangladesh	150	45	73	50	43
Sudan	42	40	12	50	7.2
Yemen	23	45	10	50	6
Algeria	36	23	15	50	9
Egypt	82	20	40	50	24
Turkey	77	20	24	50	14.4

To conclude, the system of zakah provides a permanent mechanism from within the economy to continuously transfer income from the haves to the have not, hence there will always be a continuous flow of transfer to take care of the welfare of the whole society. So for Muslim countries who seek a better life for all and a well developed society we believe that Muslims have no choice except to revert back to their Islamic teaching and institutions, as a sure way to solve their entire economic problems.
About the Author
Dr. Magda Ismail is a Lecturer at the Economic and Governance Department and Buerhan Saiti is a Ph.D. student at INCEIF, the Global University of Islamic Finance in Kuala Lumpur, Malaysia.