Principles of Taxation Policy

The general principles of taxation policy in an Islamic state will be derived on the basis of the foregoing definition of the Islamic state, its priorities, and its economic role. This part will concentrate on two areas of taxation policy: (1) the conditions for imposing new taxes, and (2) the determination of the taxpayers and the tax procedures.

The Conditions for Imposing New Taxes

Needless to say that the Islamic state is bound by this religion whose Messenger (peace be upon him) laid the ground for relations among people and between all (or anyone) of them and the state on the basis of:

“What is lawful is dear, and what is prohibited is dear.”

Consequently, the Islamic state is not free in setting the economic and political priorities, nor it is free in imposing any pattern of government spending, taxes, or any political, social, or economic limitations on its people that may violate their freedom and rights given to them by Allah, knowing certainly that Shari'ah provides means for dealing with exceptional cases.

Many Muslim scholars, ancient and contemporary, have dealt with the question of whether or not the state can impose taxes other than Zakah. Their answers are generally negative in the case of the old schools and affirmative in the case of the contemporary writers. However, a survey of the texts, verses and sayings, provided as arguments on the two sides allows us to deduce the following points:

1. Texts of sayings that directly allow or forbid imposing taxes in addition to Zakah do not withstand Hadith scrutinization and are not generally acceptable.
2. If Zakah is defined in a way to include duties on agricultural products and cattles, there is no text that can be used as a basis for analogy to allow the state to levy additional taxes.
3. The verse 177 of Surah 2 deals with spending on categories of recipients exactly similar to those included among the recipients of Zakah. Therefore, the most that can be said about this kind of spending is that it becomes obligatory only if Zakah is not sufficient.
4. Specifically, purposes of welfare, development, and/or economic equilibrium have no references in texts of Quran or Sunnah whether explicit or implicit.
5. Texts of general cooperation and solidarity among Muslims do not serve as evidence for allowing taxes to be imposed on specific people for specific purposes unless it can be proven that there are no means of cooperation and solidarity other than such taxes.
6. There are clear and strong texts that protect private property from any act of aggression whether by the state or by individuals.
7. There are many texts that allow the violation of a less important rule for the safeguard of a more important rule, and the sacrifice of a minor benefit for a higher benefit in application of: “necessities make forbidden things allowed”,
8. Necessities must not be exaggerated and must be measured with a correct yardstick, because the general rule is that killing or taking property is forbidden unless through the right application of Shari 'ah.

In practice, these eight points were carefully utilized in determining the legitimacy of taxes by the early Muslim scholars throughout history. For example, Imam Malik, who is often quoted as an advocate of taxes, says that:

“if there were no funds in the treasury or the needs of the army increased above the capacity of the treasury, the state has the right to levy taxes on the rich up to the level that satisfies that need immediately and until the revenues of the treasury appear.”

It is worth noticing that Imam Malik mentioned five important conditions: (a) regular revenues are depleted, (b) defence expenses exceed current resources, (c) taxes are levied temporarily, (d) taxes are imposed to the extent not exceeding needs, and (e) taxes are levied on the rich only.

Ibn Hazm is also quoted to support taxation. However, he restricts the levying of taxes to the case where Zakah proceeds are not sufficient to fulfil the needs of poor. According to him, the poor people “should be given the indispensable food and clothes for winter and summer and a shelter that protects them from rain, sun, and eyes of passers-by.’’

Abd al-Haiy al-Kattani discusses the collective duties that strengthen the interests of Muslims both in religious affairs and in worldly affairs such as salaries of military personnel, students and researchers in Shari'ah studies, and teachers of young children and concludes that such payments should be provided by the treasury and in case of shortage of its revenues, Muslims are collectively responsible for raising the necessary funds.

Thus, the imposition of taxes over and above Zakah is justified according to Malik, Ibn Hazm, and Kattani in cases of defence needs, assurance of a subsistent living of the poor and the indispensable expenses that safeguard the collective interests of Muslims. These three thinkers did not mention development, equilibrium, and welfare for justifying taxes.

From the above discussion, it becomes clear that the levying of taxes, in addition to Zakah, is an exception and not a rule. Taxes can be imposed by the Islamic state under certain circumstances and conditions. Therefore, it is extremely important to determine these circumstances in a clear way. Two areas deserve our attention in determining these exceptional conditions that provide justification for taxes: first, the kind and urgency of necessities, and second, the alternatives available to fulfil these necessities.

Necessities that Justify Taxation

Generally, the cases that justify imposing taxes may be summarized as follows:

1. Internal and external security, e.g. the cost of regular and emergency forces at times of peace and war to the extent that these provide security and safeguard of the religion, Muslim land and people including freeing Muslim captives in other countries.
2. Current expenses of activities of the Islamic state such as the political apparatus (the cost of running the executive and Shura branches of government), the judicial and Hisba apparatus, and the safeguard and promotion of the ideological and ethical values of Islam.
3. The maintenance of a socially determined subsistence standard of living for all people in the Islamic state. The subsistence level includes what Ibn Hazm described as indispensable food, clothes, and shelter or what Ali described as preventing hunger, nakedness, and hardship.50 Al-Shatibi’s definition of necessities provides not only for material and biological needs but also for needs arising from social and religious living, i.e. the subsistence standard of living must include such services as minimum education, transportation, and health care.
4. A distinction is needed, however, between subsistence and welfare. The difference is basically a matter of degree, and with the help of Al-Shatibi’s definitions of necessities, wants and luxuries one can shed some light on this difference. Necessities are indispensable for human-beings in areas of religion, life, mind, geneological reproduction, and property. The satisfaction of wants improves the quality of life and removes “bearable hardship and difficulty”. While the luxuries add beauty, elegance, and fragrance (not reaching the prohibited extravagance). The concept of subsistence deals with the necessities, whereas, the concept of welfare includes the wants and sometimes the luxuries.
5. The development of a production capacity in the society, adequate to provide the subsistence living mentioned above if the private sector is not providing such production.
6. Relief of economic, social, and psychological pressures resulting from natural disasters, war-,or any similar emergency.

Alternative Means of Finance

Theoretically, taxes are the last resort in Islam. Muslim scholars have no disagreement that taxes may be levied when the state has no other resources and in quantities not exceeding the deficit of funds. In practice, the early financial history of the Muslim state tells that taxes were not imposed unless in the very exceptional emergencies. It is a fact that the cases of tax imposition were very few in the history of Islam because the state was rich and rarely needed more resources. This fact, in itself, has two implications: (1) taxes were considered as a last resort by practicing politicians, and (2) there were several other resources available to the Islamic state. Consequently, in stating what may be available to a modern Islamic state, one should take time to see if these old and traditional means of finance are to be included.

1. Kheraj. Kheraj is a rental fee on the land that becomes a property of the Islamic state as a result of its liberation by Muslim troops. It was total agreement, Ijma, of the Companions to keep such land as a property of the state and collect rental fees for it so that all generations of Muslims may benefit from these lands. Almost all the lands of the Middle East and North Africa with the exception of the Arabian Peninsula are of this category. The fees are not necessarily constant at the level laid at Umar’s time, nor can they be eliminated when holding of the land is transferred to Muslims. Further, the state may not interfere in the form of use of the land, kinds of production, and transfer of holding of land because of its right to the rental fee. Consequently, there is no reason for not continuing this rental fee in all countries whose lands are Kheraji land, whether this land is used for agriculture, industry, or urban services.
2. Jazia. Jazia on non-Muslims is, at least, equal to the Zakab on Muslims. It is a toll tax on all non-Muslim adults in the Islamic state.
3. Revenue of Public Enterprises. According to many Muslim scholars the ownership of minerals and public natural resources such as rivers and top-of-ground minerals is vested in the Islamic state.
4. Public Debt. By public debt we mean voluntary and obligatory internal borrowing, and borrowing from abroad. All loans must be interest-free. Voluntary domestic loans are motivated by Islamic inspiration and patriotism. Obligatory loans may be obtained directly from the public or indirectly in the form of loans obtained from the central bank to the extent that they do not destabilize prices. Forced borrowing from the public is a viable alternative to taxes in cases of emergencies coupled with expected revenues. Borrowing from the central bank is a form of forced borrowing, but it reflects badly on the general price level. Therefore, its use should be restricted to the extent that does not destabilize prices. Loans from other countries on an interest-free basis are generally hard to find and, therefore, one may not count much on their availability.
5. Equity Finance. Financing many development projects through the sale of their shares to the public is an important means of recruiting participation, involvement and resources of the public for the development scheme. Equity-sharing on the basis of Qirad may be practiced domestically and internationally, provided that the foreign shareholding does not adversely affect the economic and political independence of the Islamic state.
6. Fees. Many local government services may be provided against fees that cover all or part of their costs. However, fees may not exceed the cost of services rendered.
7. Voluntary Contributions. The Islamic state has an important source of revenue by voluntary contributions that are donated by individuals in response to its appeals for financing specific projects and ventures. This was the most promising source at the time of the Prophet (peace be upon him) and there is no reason why it should dry up at our time.

It should be noticed that while Zakah receipts are appropriated for distribution to one or more of the recipient’s categories mentioned in the Quran, the proceeds of most of the above sources are not, and the Islamic state is free to make the choice of financial-resource utilization in the light of the general guidance in the Quran and the Sunnah. This is supported by Umar’s policy in distributing the funds coming from the war booties in Medina until everybody became practically rich, while he did not impose taxes on the wealthy in order to make the non-poor better off, i.e. in order to make the distribution of wealth and income more equitable. However, certain resources are restricted to specific purposes such as borrowing and contributions to special projects and equity-sharing. On the other hand, although Zakah proceeds are designated, they, wholly or partially, may be used for the development of a productive capacity adequate to support the defence activities and the subsistence level of living. Consequently, the state revenues, including Zakah, may be classified into general and designated. General revenues should be used: firstly, to supply adequate satisfaction of such necessities as internal security, and government apparatus, etc.; and secondly, to support the objectives of the designated revenues. Taxes, other than those mentioned above, may be imposed only if the regular revenues are not sufficient to face the necessities discussed earlier.

Moreover, forced borrowing is similar to taxes in that they both are imposed by coercion on the basis of the state authority. Hence, if taxes are the last resort, compulsory borrowing is the one before last. Consequently, forced borrowing represents a close alternative to taxes when the state expects future revenues usable for the same kind of necessity. For example, for defence expenses, the state may not be allowed to levy taxes if it can borrow and pay back from future Zakah and Kheraj. By applying the same rationale, a general equilibrium tax is not allowed as long as the state can substitute it by forced loans from the public obtained at times of boom and retired at times of recession, since for the purpose of general equilibrium, there is no need for financial revenues but the purpose is to withdraw some means of payments from the hands of the public at some time and to return them at another time. Consequently, a tax is not justifiable while a loan maybe.

Taxpayers and Procedures

A survey of the texts of sayings, the statements of Companions and great scholars, and the practice of the early Islamic era indicates the following principles:

1. Concerning the determination of the payees of taxes, other than those clearly mentioned in Shari'ah, we find three main principles:

1. The financial capacity is a basic criterion in determining tax liability. The concept of “excess” and richness are the main indications of taxability. While the guarantee of the subsistence level is the determinant of tax levying, taxes may not be imposed on those having “adequate” means of living, i.e. above subsistence but below the rich category. Taxes are only imposed on the rich and inasmuch as they can afford. It should be noticed that while Zakah is fairly determined as far as its incidence, rate and exemptions are concerned, additional taxes, if levied, are generally restricted in their incidence, i.e. the payees, whereas, the rates and exemptions are left to the needs and necessities in the society. The restriction of additional taxes to the “rich” is important in the Islamic thinking because it runs counter to the commonly used argument that sharp progressive taxes adversely affect the “rich’s” incentives to invest. On the other hand, this restriction is consistent with the Islamic objective of “let wealth circulate and change hands” and the Islamic concept of economic justice. An implication of this principle is that the state should take sufficient measures to ensure that the final incidence of the tax may not be shifted to the poor through pricing policies and other means. Moreover, this principle has a heavy and adverse bearing on taxes levied on basic commodities consumed by the masses in the developing Muslim countries since these taxes affect the poor at least as much as they affect the rich.
2. Taxes on windfall profit and windfall capital gains may be imposed especially in cases where the possibility for an explicit or implicit exploitation of a political position or extraordinary economic condition is involved.
3. Custom duties on non-Muslim merchants may be imposed, especially when the entry of foreign merchandise is governed by treaties specifying such duties on mutual grounds.

2. Concerning the procedures of tax assessment and collection, we find three main principles:

1. The assessment of all revenues {Zakah, Kheraj, Jazia, taxes, etc.) should be just and easy. The payee should be left with a feeling of comfort and satisfaction, errors should be taken to the favour of the assessee, and his claim of exemptions, such as debts is acceptable unless there is clear evidence to the contrary. The assessee should leave out the fractions in calculation to the favour of the assessee and the collector must avoid “taking the best of their property”
2. The burden of the duty must be distributed evenly among the equals. Justice in the distribution of the burden of any state revenue implies that the ultimate incidence of the tax burden is what matters in the final analysis. Accordingly, a careful study of incidence shifting must be made in order to avoid injustice in the distribution of the burden of the state revenues.
3. Many Fuqaha rule that escaping of an unjust levy is permissible if such an action does not result in a “bigger” injustice.

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