Fiscal policy in view of islamic laws

1. By
Inzemam Ul Haq

2.  Intoduction
 ISLAMIC FISCAL SYSTEM
 SOURCES OF REVENUE
 Early and with the passage of time
 EXPENDITURE
 Early and with the passage of time
 PUBLIC DEBT
 Frame Work

3.  The way a government collect recourses frame
the economy and allocate these to various ends
is called the fiscal system
 is the use of government revenue collection
(mainly taxes) and expenditure (spending) to
influence the economy.
 The comprehensive statement of government
revenue and expenditure called budget.

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

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

6.  Zakat and Ushur(Custom duties)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 in the form of
Jizyah(poll tax) and Kharaj(land revenue).
 Non tax item include (a) Royalty and rent from the
state properties (b) War Booty (Ghana im) (c)
Voluntary Contribution

7.  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 , Ushr was 10% or
equal to rate (s) imposed by these countries on
Muslims entering their land with merchandise.

8.  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.

9. 1. A Tax should with consultation of (Shurah)
2. Any proposed taxation should not duplicate Zakat.
(subsidzeining necessities)
3. Any proposed taxation should not be against the
basic principal of Zakat(not targeting the poor).
4. Not carry a permanent nature like Zakat otherwise
leeds to bedaa.
5. least burden
6. Equity
7. Convenience
8. Carful handling
9. Certainity ,flexibility,simplicity(adamsmith,

10. Taxation against Zakat avoidance.
 Taxation can play preventive role to stop or
minimize Zakat voidence in contemporary muslim
Societies.
Taxation for macroeconomic adjustment.
 For example at times of inflation taxation can be
used to reduce Aggregate Expenditure by imposing
taxes on luxurious consumption.
Taxes against harmful consumption.
 heavy taxes that can be imposed on tobacco
smoking,
Taxes against Pollution.
Taxation for National defence

11.  Zakat resources The Poor, Needy, Zakat
collectors, new converts to Islam, the heavily
indebted people, Slaves and Captives that
have to be liberated, Way farers, and for the
Cause of Allah SW.
 Kharaj and Jazya spent on public works and
infrastructure such as bridges, irrigation
canals and road construction. This Public
Expenditure relied upon

12. Zakat Sources (a) Covering needs of all Zakat
recipients in the household sector, and in particular
sustaining Low-income categories (the Poor and
Needy) with necessities, and nourishment.
 (b) Investment that would directly or indirectly
benefit the poor, needy, wayfarers, and
 (c) Subsidies to help micro or small enterprises
facing particular financial difficulties or heavy
indebtedness.
 (d) National Defence
 Maintenance and running of the Hesba System .
This system ensures that markets are not involved
in activities or transactions that are
 Prohibited by shariah

13. Public Expenditure based on Targets behind
additional Taxes.
Within the spirit of the Islamic Taxation System,
Government is responsible of Employment of Tax
revenues in accordance to purposes for which a tax
was imposed.
 Examples: Government would be responsible to
assign Public Expenditure for:
 (a) Medical treatment of people who suffer illness
because of tobacco smoking, when a Tax is imposed
to for this purpose.
 (b) Educational Programs designed to make people
aware of the harmful effect of types of
entertainments that implicitly carries non-ethical
values, when a Tax is imposed to for this purpose.
Or alternatively for the same purpose providing or
subsidizing types of entertainments that are
Shariah permissible.

14.  (c) Financing Medical Centers that offer free
treatment to people suffering from pollution
as well as Research Centers which target the
development of cleaner and environmental
friendly methods of production. This when
Taxes are imposed for purposes of fighting
Pollution and improving the environment.
 (d) Financing Research Centers for purposes
of modernizing and improving the defence
system when a Tax is imposed for such target.

15.  Within the Islamic Conception of Welfare the State is
responsible for establishing, maintaining and running
“necessary” Public Utilities.
 (a) The State during the period of the Prophet Pbuh showed
concern with provision of clean water for household use.
 (b) Later on, in the early Hijri centuries , with the great
expansion of the Islamic State, the government constructed
and maintained roads, bridges and canals for irrigation.
 The government during the Abbasside State assigned
Public expenditure for purposes like: building houses for
poor people, homeless widows, helping young men getting
married, giving financial support to scholars and students ,
translation works, and founding public libraries.

16.  Within an Islamic System Three Main Factors
determine the answer of this question:
 (1) The Islamic conception of social and economic
welfare, which is never in opposition with
betterment of human, social life as long as this is
does not mean targeting excessive Affluence or
Extravagance.
 (2) The Nature of Public Utilities, For example
Public Necessities that cannot be provided by
individual or private efforts or through Market
would be the responsibility of the Government.
 (3) Fiscal Policy and availability of Public Revenues
that can be assigned for extra Public Expenditure.

17.  A Surplus in Zakat Revenues would help in
extending Public Expenditure to cover some types
of Public Necessities or Conveniences as happened
in the past.
 Taxation is one solution to provide the needed
financial resources.
 However, Alternatives to Taxation have to be
explored:
 Examples; (a) Public borrowing , (b) B.O.T contracts
allowing the Private sector to establish and run
these utilities on commercial bases, or (c) Voluntary
Private Efforts on non-commercial bases, or (d)
Revival of the Waqf System >>

18.  In a situation where Actual or Planned Public
Expenditure exceeds available Public
Revenues
 Legitimacy The Prophet (Pbuh) encouraged
Good Loans, in money or in kind, to finance
the Muslim’s army or to provide Muslim
households with clean Water.
 Companions of the Prophet Pbuh who
granted Good Loans waived voluntarily their
rights in these loans. Thus Loans had no
burden at all on Beit-ul-Mal (Treasury).

19. 1. Should repay the debt with in the
settled time(banks,individual,govt)
2. Should be careful about interest
bearing activity (Loans and Security)
3. Borrowing should frome Islamic
banks.
4. More emphasizing on Good
Loans(sukuk and interest free
security)

20. 6.Tax as tool for paying debt be conscious
about the said principal
7. should not be employed in luxurious activity.
8.Should not be used for profitable business.
9. Arrange only in emergency situation.
(War, Serious economic depression,
Actual shortage of neceesities.