Discussion on the Theory of Fiscal Policy

This is not correct to say that Zakah cannot be used for the public and quasi-public goods. This is based on orthodox interpretation of the use of Zakah. There is a liberal interpretation of Zakah expenditure and people have been contending that Zakah can be spent on such projects as roads or hospitals or such industries where people can be provided employment opportunities.

My second point is that though non-profit institutions exist in non- Muslim countries also (as Dr. Uzair pointed out) the difference is that such non-profit activities in Islamic societies are done for the sake of reward in Akhira.

M. Akram

I have to disagree on the point that Zakah can be spent on public or quasi-public goods. This is a general misunderstanding. I think it cannot be spent on general welfare projects like constructing bridges, roads and for the provision of education and health facilities etc. I would like to refer to Surah Taubah in support of my contention, wherein the categories, for which Zakah can be used, are explicitly mentioned.

It is very important for us to note that whereas the rate of Zakah has not been specifically mentioned in the Quran, the eight categories of expenditure have been specified by God Almighty. If you try to extend the list of beneficiaries of Zakah, it will never reach to those who are in real need. The other point is that Zakah has been levied in a way that it least impairs the growth of wealth. It is levied in a way that encourages the circulation of wealth in the economy and also lead to further production of wealth. That is why we have to follow the path laid down in the Holy Quran with lot of care when spending Zakah. My last point is that Zakah is compulsory. Sustenance of those who are in need cannot be left to the voluntary actions.

Mrs. Rehana Islam

We should not call Zakah a tax. Tax is something which is paid with discomfort. It is a burden; that is why we calculate tax-burden. Zakah is an obligation that has to be paid with pleasure. The other point which Prof. Faridi has mentioned is about the poverty line. He seems to be engaged in finding another tax so that those who fall above the Nisab but are considered to be poor, may be paid by that tax. Poverty line is a relative concept. We do not have an absolute poverty line. It depends upon the state of the economy and the relative position of the people. An other point in this regard is that there may not be any need of this extra tax. In the Fiqh of Abdul Malik you can pay from the Zakah even to those people who are paying Zakah and we have many examples. Hazrat Umar paid Zakah to such people, who were above the Nisab level. I do not agree with Dr. Zarqa that the able bodied people should not be paid Zakah. One person came to our Holy Prophet (peace be upon him). He was healthy and sound but was poor. He gave him certain means of production, e.g., tools of construction. So those people who are able to work but do not have the means of production should be paid from Zakah.

Dr. Omar Zubair

I should not be misunderstood if I say that if you want to make Zakah really a powerful fiscal tool, then following four points will have to be kept in mind: Firstly, the basic rate of 2'A per cent and other rates will have to be manipulated. Secondly, the scope might have to be enlarged. Thirdly, the base might also have to be enlarged. Fourthly, for the Nisab we will also have to do a little rethinking.

Since this is impossible, because they are based on devine message, Zakah is not really a powerful tool to serve all the objectives of fiscal policy. It will not be able to play a powerful role unless it is complemented by other taxes. Take the example of Pakitan where Zakah legislation has been able to generate a total of Rs. 480 million. This amount has been spent on roughly 2 to 3 per cent of the total population about which records are available. Nobody knows accurately, but roughly the number of persons needing support range from 15 to 20 per cent of the population. So Zakah really cannot play a powerful fiscal role in developing countries like Pakistan unless it is supported by other taxes.

Prof. Rafiq Ahmed

I think most of the problems have arisen from the title of the paper wherein he says a theory of fiscal policy. So far he has been talking of practice of fiscal policy. In actual practice I think what he is saying makes sense. But I think a paper on the theory is expected to cover ideal situations. From this point of view, Dr. Faridi’s paper cannot be accepted as a paper on the theory of fiscal policy.

Secondly, I would like Dr. Faridi to work out the equilibrium conditions for his model. I think the third sector will not exist under equilibrium.

Prof. Syed Nawab Haider Naqvi

There is a tendency to regard Zakah as a tax in the modern terminology and that is why people come up with all types of suggestions. Zakah is an Ibadah and not a tax. Moreover, it is a divine commandment and we should not entertain the ideas of broadening the base and uses of Zakah.

Dr. Mohamed Ariff

The author has defined the optimum allocation of resources with respect to given income and technology. I think this is a rather static definition. The optimum allocation of resources should aim at maximising income and other objectives. Dr. Faridi’s paper also lacks the discussion on the trade-offs between growth and equity objectives of fiscal policy.

Dr. Sultan Abu AM

I agree that it was probably a mistake on my part not to recognise the role of other measures in the distribution of income and wealth as pointed out by Dr. Zarqa. The second point that I would like to make is that there is a misunderstanding about what I have said about the use of Zakah on public and quasi-public goods. I have not made a general statement that all kinds of welfare activities would be financed out of Zakah. I think I have only stipulated that some public and quasipublic goods which cater to the needs of the poor may be financed out of Zakah.

It is logically wrong to compare the Ford Foundation and such other institutions with the poor developing countries. What would be logically right, is to try to compare the budget of these voluntary institutions in the United States with the budget of the private, profit motivated sector there and then compare this with the same in Muslim countries. That would be a correct comparison. The voluntary sector is an integral part of the entire economic operation of an Islamic society. It is not grafted. It is something which is inherent in the Islamic economy. Whether you like it or not, it will be there. Even today some of the Islamic countries are maintaining Auqaf. Can you imagine that in a non-lslamic society Auqaf had been created for maintaining the horses and cattle and for dogs and for a lot of other activities and some of these “Auqafs” still exist.

I have not said that the role of public sector should be minimised. I have also not said that there will be no government sector or that it will stand in the corner. If my statements can be interpreted like that I do not know how else it can be expressed.

I do not agree that the equilibrium in my paper is a static equilibrium. It is a dynamic equilibrium.

Dr. F. R. Faridi

Source: Fiscal Policy and Resource Allocation in Islam, Ziauddin Ahmed, Munawar Iqbal and M. Fahim Khan. Republished with permission.