DISTRIBUTION OF ZAKT

Alms are for the poor and the needy, and those employed to administer the funds; for those whose hearts have been (recently) reconciled (to the truth); for those who are in bondage and in debt; in the cause of AllOEh; and for the wayfarer; (thus it is) ordained by AllOEh, and AllOEh is full of knowledge and wisdom. (al-QurOEn, 9:60)

2.2 GOVERNMENT SPENDING, TAXES AND ZAKT

For analytical purposes, an economy can be classified into three major sectors: the household, business, and the government sectors. The household sector supplies the factors of production to the business and government sectors, receive income in return and then spends on goods and services. It is the major sector in terms of spending. Business firms employ labor and other factors of production to produce goods and services while the government sector collects zakOEt and taxes from the household and business sectors and also allocates the budget for various government expenditures. Muslim economists argue that if an Islamic State has insufficient financial resources, the State could establish a just tax system to collect taxes, Faridi (1983)1 and Kahf (1998).2 A just tax system should not burden the tax payers and therefore taxation should be based on the ability to pay principal.3 In the context of Islam, the tax system has to follow the principles of the zakOEt system. Specifically, a tax must be imposed on the rich in accordance to their income level, direct taxation is preferred to indirect taxation, and tax exemption should always be provided. Therefore the major tax base should be the personal income tax and the corporate income tax, Kahf (1998). Although zakOEt payment is a religious obligation, practically the payment of zakOEt by individuals, in some Muslim countries, are individual choices in the sense that there has been no concerted effort by the authorities to enforce the payment of zakOEt. Furthermore, the collection of zakOEt is rather unorganized. The governments may have their agencies to collect zakOEt but as far as an individual Muslim is concerned, he can still fulfill his zakOEt obligation by paying his zakOEt due direct to the target groups; they consider this act as more rewarding and this point is very difficult to challenge. The zakOEt collection is disbursed to the special people who are clearly stated in the QurOEn and this act is a divine requirement and therefore zakOEt is a special form of transfer payments. The tax collection is used by the government to purchase goods and services such as military equipment, build highways, schools, universities, hospitals, and pay salaries to the government servants. The government may also make disbursement to transfer the tax collection to the populace in the form of welfare payments to the less fortunate. Government purchases are exhaustive in the sense that they

Fiscal Policy in an Islamic Economy and the Role of ZakOEt 123

directly absorb or employ resources to produce goods and services. Transfer payments are, on the other hand, non-exhaustive as they do not employ resources and therefore do not directly contribute to the production of current output. Government purchases and transfer payments have different impacts on the allocation of resources. Government spending results in reallocation of resources for the production of more public goods, while the government transfers will change the composition of private goods and services.

Zakah" is the technical Shariah meaning, Zakat means that part of wealth whose payment has been made obligatory by Allah and His Prophet (SM). Similarly, giving of specified part of the wealth who are entitled to get it, is also called Zakat.[

Giving this wealth is called Zakat because it cleanses the heart and mind of the payer, it cleanses also his wealth ( in the ultimate economic analysis). It gives increase to the poor in the sense that he gets something for his benefit and his mind is satisfied which is a psychological increase.

On the other hand, Tax is an obligation imposed by the state on the citizens. Taxation is required to cover government expenditure. For a long time, governments imposed taxes to raise revenue only to cover the cost of administration and defence, and in the case of despotic monarchs for personal expenditure of the ruler.[iv] Now a days, taxes are no longer levied for defence and administration only, but also for the purpose of furthering social and economic policy of the state.

2. Similarities and Dissimilarities Between Zakat and Tax

There are some important similarities and dis-similarities between Zakat and Tax.

Similarities

a) Zakat is liable to be collected by force like tax, if the payer does not pay it willingly. This position is applicable where the state compulsorily collects Zakat, and in modern days, has legislated accordingly. The Quran and the Sunnah make it very clear that it is the obligation of an Islamic state which follows Islam to collect Zakat. An important proof in this regard is the decision of Hazrat Abu Bakr (R.A.), the first head of the state of the Islamic Khilafat, to wage war against those who denied to pay Zakat to the state.[v]

b) Zakat collected in an Islamic state has to be kept in the state Treasury, in a separate account, like tax. Zakat is collected by the state through Zakat officials (Amelina Alaiha). However, if Zakat is collected by Non-government organizations or communities, these should be kept safely as in the case of any public fund.

c) Zakat, like tax, is paid though there is no direct and equivalent economic benefit is obtained by the payer This is a different matter that Zakat payer expects return in the life hereafter and the tax payer may receive some service from the state in return but there is no direct co-relation

Dissimilarities

a) There are also important conceptual and other differences between Zakat and Tax. Primarily, Zakat is an Ibadah (act of worship) which Allah has made compulsory on human being, to express gratitude to Him and to obtain His nearness (Taqwa). Tax is not the same thing as Zakat. Tax is a social obligation without having special sense of gratitude to Allah or to obtain nearness to Allah while Zakat is essentially a matter between Allah and His servants, but tax has been primarily a matter between citizens and the state authorities..

b) Zakat is based on Nisab, any wealth below a limit is exempted from Zakat. This is not true in case of many taxes in modern times. Concept of exemption is there in case of tax but it is applicable only when and where the Government or Tax authorities specifically prescribe.

c) Zakat is a permanent and regular system. None can change it in any way. On the contrary, most of the taxes undergo change from time to time.

There is difference between Zakat and tax in respect of the utilisation of respective fund whereas tax can be spent for any purpose. Zakat is meant to be spent for specified objectives which are mainly provision for the poor (poverty alleviation), to free debtors from the debt, to free the people in bondage, for the way farer and for the good of the people i.e. Fi Sabi Lillah

The religious aspect of Zakatestablishes differences with SecularTaxesin three major areas, namely Tax burden, Tax avoidanceand Tax evasion: >>
(a) Tax burden; Taximposed 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 taxesby illegal means, and this can never be done by any believer

Zakat as an Islamic Tax has three major Economic Effects : (a) Distribution Effect, (b) Income Effect, and (c) Growth Effect.

(a) Distribution Effect

Zakat is collected annually from rich peoples income and wealth and is distributed to 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.

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.

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.