Islamic Finance: Wealth Distribution and Taxation in Islam

The Islamic economic system is a mixed economic system which includes the ideas of capitalism which permits private ownership and socialism which encourages distribution of wealth among all.  While permitting the private ownership of the properties and private business, Islam never permits the accumulation of the wealth in the hands of few people. Hence, there are a various mechanism in Islamic economic system that ensures the right of eligible poor people in the fixed percentage of the wealth of eligible rich people to give.

 The Islamic State is accountable to assemble taxes and to transfer payments to the poor in order to improve income and wealth distribution and ensure equity in the society. Furthermore, individuals are highly encouraged to make charitable contributions to needy people.

There are four main categories of taxation and wealth distribution in Islam:

(1)   Zakat:

The meaning of Zakat is purity. Zakat has various philosophical aspects such as it is not only a taxation system, but also a way of charity, kindness, and spirituality. Zakat is a wealth tax obligatory on all income-earning assets such as the ownership of animals, gold, and silver, money, articles of trade, and the produce of the land. It is collected by the government to ensure the proper distribution of money among the poor and needy in order to improve income/wealth distribution. One has no legal option to keep the amount of Zakat to be given on his asset side.

Features of Zakat:

a.       Zakat is mandatory only for  Muslims.

b.      Zakat amount will be calculated for net balance after all credits.

c.       Zakat can be given to only 7 types of people who are the eligible recipients of Zakat; they are: 1)Miskeen: on who has no basic amenities such as shelter, food, and cloth, 2) Faqir: One who has basic amenities but is needy for day to day living needs, 3) a Muslim prisoner for a good cause, 4) the Muslim employee who has been appointed to collect the Zakat, 5) A Muslim fighter, 6) A Muslim traveler for a religious cause and 7) One who incurred in debts. 

d.      The kinds of wealth to be given Zakat from are livestock, gold, silver, harvest, and Money.

e.       Zakat is to be given when your wealth reaches the Nisab which is the minimum amount of property that must be owned by a Muslim to be obliged to give zakat.

f.       Nisab in Gold is 87.479 grams and the rate of zakat in gold is 2.5%. It means when the non-wearing gold in your hand reaches 87.479 grams, you have to give 2.5% of it.

g.      Nisab in Silver is 612.35 grams and rate of Zakat is 2.5%.

h.      Nisab in Wheat is 847 Kg and the rate of Zakat is 1/10 if naturally irrigated and 1/20 if manually irrigated; if irrigated by both ways, then half of the total wheat will be given on 1/10 and the other half on 1/20.

i.        The Nisab in sheep is 40 sheep; then 1 sheep should be given if the total number of sheep reaches 121 sheep then 2 sheep should be given, for 201: 3 should be given, for 301:4 should be given, for more than 400: 1 for each hundred should be given.

j.       The Nisab in cow is 30; then 1 two-year-old cow should be given. If the total number of sheep reaches 40; then 1 3-year-old cow should be given. The rate of zakat for a larger number of cows will be calculated on multiplication of 30 and 40.

k.      The Nisab in the money: based on the opinion of the majority of Ulamas, the Nisab in Money will be considered as the same as silver. (As the contemporary currency system did not prevail at time of Prophet; the silver and gold was the popular mean of exchange). Hence,if the money in your asset side which includes cash in hand, bank deposit, the money given on loans, share, pension fund, the value of stock in hand, business investment, maintains the net balance equal to or more than the market value of 612.35 grams of silver; then it's 2.5% is obliged to be given as Zakat.  (ie. if the market value of 1 gram of silver is 40.00 rupees, then 612.35 X 40.00 = 24,494/- is the rate at which you are obliged to give zakat in money)

(2) Ushr

Ushr or the tithe is a property tax on Muslims on fertile land when and only when it harvests output. The tax rate depends on the quality of the land: 5% on irrigated land and 10% on rain-fed land.

(3) Kharaj

Kharaj is tax on non-Muslims on revenues from the land. It can be fixed such as per unit of land or per tree or proportional such as 10% of the output.

(4) Jizyah

Jizyah is the tax paid by non-Muslims to receive protection from the state. It is a lump-sum tax depending on the capacity to pay; 48 dirhams by the rich people, 24 dirhams by the middle-class, and 12 dirhams by the poor. By paying Jizyah the Muslim state fully obliged to give protection to the land and lives of the non-Muslims living in the Muslim state.