Origins, Evolution and the Future
Studies in Islamic Finance, Accounting and Governance series
Chapter 6: Obligatory Redistribution of Wealth: Taxation and Institutions of Tax Collection, the Origins of Modern Sukuk
We will be discussing here the emergence of a fundamental component of public finance, the state (or government) borrowing from the public.1 In the Islamic world, this problem appears to be particularly difficult in view of the interest prohibition. Indeed, how can the government of an Islamic country borrow much-needed funds from the public in an environment where the interest-bearing loan transactions are prohibited by the Shari’ah? But first, let us look at the taxes themselves, since states resort to borrowing only when taxes they collect do not suffice to cover their expenses. Zakat As it is well known, payment of zakat is considered to be as one of the five pillars of Islam. Some scholars consider it the third pillar, after the kalimah and the salat/namaz. The word zakat is mentioned 30 times in the Qur’an.2 A careful study of the Qur’an reveals that during the Mecca period the concept was introduced and then during the Madinah era its details such as the taxable properties, the rate of taxation, its collection and disbursement became clear. It is generally accepted that every free and sane Muslim adult, providing he/she fulfils the conditions to be discussed below, is ordained to pay the zakat. Since zakat is a tax paid by Muslims, non-Muslims living in an Islamic state are not obliged to pay this tax.3 There are several conditions attached to the payment of zakat. First, the property or cash subject to zakat must be clearly in the possession of the person...
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