The Treasury

The functions of the public sector have been traditionally divided into what is known to be the distributive branch and the allocative branch. While this would bear similarity to the Islamic structure, there are some differences.

The distributive branch in the Islamic system is responsible for the collection as well as the distribution of Zakah. The allocative branch takes responsibility of the mineral resources which are generally considered to be a social property. This adds another feature to the allocative branch which is traditionally known to be in charge of the financing and production of public goods.

Handling monopolies, ensuring orderly markets, correcting for externalities, and the like can be placed in another branch which will be termed as the “market correction branch”.

The Distributive Branch

A distributive tax is levied on the following:

1. Monetary assets held for one year, including cash, demand deposits and debt.
2. Titles to real as£ts held for a year, e.g. shares, profit-sharing funds, etc.
3. Gold, precious ifletals, and diamonds, on the basis of their current market value, when held for a year.
4. Net earnings of assets not included in the above categories.

The tax rates, which differ from one category of assets to another, are applied to holdings over and above a certain level. Persons having an income below a certain “minimum” level, called nisab, are entitled to a share of Zakah process, until they reach that nisab. The government is allowed to increase Zakah collection if incomes below nisab persist, despite the collection (and distribution) of ordinary rates and as long as the current distribution of wealth allows further redistribution.

The Allocative Branch

(a) Division of Mineral Resources

The state ownership of mineral resources does not necessarily imply state production. The state could enfranchise private producers for this purpose. However, the state can involve itself in the production of minerals through state-owned enterprises.

The Mineral Resource Division assumes, directly or indirectly, the responsibility for mineral production, and its proceeds are added to the Treasury to be used for financing government operations.

(b) Division of Public Goods

Public goods are the goods whose consumption is carried out collectively, e.g. defend, education, certain categories of health services, and so forth. While the details of their provision is determined through the political process, the state stands responsible for putting those provisions into effect.

Public goods may be produced directly by government-owned enterprises or by private-sector enterprises. They are financed by the net proceeds from the Mineral Resource Division and from other taxes. Some of the public goods, like defence, can be financed from Zakah proceeds given enough funds from that source.

(c) Division of Market Order

The working of free luarkets can always be disturbed by the rise of monopolies, the existence of externalities, and other market “disorders”. Dealing with such problems could involve a certain tax-subsidy network or direct regulations by the government. Most of the time, what is required is a tax-subsidy scheme. In extreme cases, direct control may be called for. These operations could be financed through balancing tax collections with subsidy payments. It may also call for special taxes to finance the maintenance of “orderly markets”.

Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.