Title page

Course Name M.Com

Course Code Taxation Management (8531)
Semester 4th (Autumn 2020)
Submit to A/P Faraz khan
Submit by Anosh Qayyum
R0ll No Bw510811
TopicZakat as an alternate to income tax in Pakistan
Allama Iqbal Open University (I.E.T)
 Acknowledgment
In the name of Almighty Allah, the most gracious, the most beneficent by help of whom I am
able to complete my assignment and accomplished all the difficult tasks relating to this
assignment. Here it is worthwhile to mention that the importance of Allama Iqbal Open
University who gave the serving people like me a chance to enter into professional education
like M.com through distance education system.

With a deep sense of gratitude, I extend my thanks to teachers at Department of Business

Administration, Allama Iqbal Open University who provided me the opportunity through this
assignment to learn practically.

.  I would like to thank my parents, whose love and guidance are with me in

 Whatever I pursue.  They are the ultimate role models for me.

 
Table of Content

Introduction 01
Tax
Zakat
Study with respect to the topic 02
Zakat as tax
Exemption from zakat Deduction
Important sub topics 05

Case study 07
State bank of Pakistan
Banking system
Role of state bank of Pakistan to deduct zakat
Rat of zakat
SWOT analysis 10
Conclusion Recommendation 13
 Abstract

Uniquely, zakat is featured as the major tool of Islamic wealth redistribution that routinely
collects designated amounts of public money from zakat payers and channels same to
identified beneficiaries in accordance with the principles of the sharia. It is, therefore, essential
to organize and develop institutions to manage this wealth. This paper critically discusses the
concept of zakat and taxation and the mandatory system in Pakistan of Zakat and Usher is
described in more detail. Zakat is a religious tax for Muslims as one of five pillars of Muslim
so it can be called as an alternative of tax. The present research paper critically discuss the
concept of zakat as tax for Muslim. The persons who are liable to pay tax and in which rate.
The Zakat and Usher are spent mainly on much targeted areas like social welfare, education
and health care for certain population groups. Other types of public goods and services are not
covered with funds received from Zakat. Hence, the question arises, whether an Islamic state
is according to the Islamic laws entitled to collect additional revenues like taxes in addition to
Zakat.
 Zakat as an alternate to income tax in Pakistan

1. Introduction

Tax

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an
individual or legal entity) by a governmental organization in order to fund government
spending and various public expenditures

Zakat

Zakat is a form of almsgiving treated in Islam as a religious obligation or tax, which, by

Quranic ranking, is next after prayer (salat) in importance.
As one of the Five Pillars of Islam, zakat is a religious duty for all Muslims who meet the
necessary criteria of wealth.it is a mandatory charitable contribution, often considered to be a
tax.[8][9] The payment and disputes on zakat have played a major role in the history of Islam,

Study with respect to the topic

Zakat As Tax

Zakat Councils are responsible for collecting and distributing the Islamic taxes known as
Zakat and Ushr in Pakistan. The Councils are overseen by the Ministry of Religious Affairs. In
Pakistan, the system of compulsory collection and distribution of Zakat and Ushr began in
1980 with an ordinance decreed by General Muhammad Zia-ul-Haq calling for a 2.5% annual
deduction from personal bank accounts on the first day of Ramadan, with the revenue to be
used for poverty relief

Zakāt is the giving of a fixed portion of one's wealth to needy people, and is one of the Five
Pillars of Islam. (Zakat purifies the wealth of a Muslim, (according to Surah At-Tawba, Ayat
60 in the Quran), and several a hadith.)

In Pakistan Zakat is levied on sahib-e-nisab, i.e. a person who owns or possesses assets liable
to Zakat under Shariah equal to or more than nisab, (about US $300, calculated according to
the value of 612.32 grams of silver. There are eleven types of assets liable to Zakat "detailed
in 1st schedule of Zakat & Ushr Ordinance 1980"
Deduction of ZAKAT

The list of Zakat-eligible assets includes cash, gold and silver, trading stocks, business income,
livestock, produce and land.

However, certain conditions must be met. For starters, the payer should have the complete
ownership of the assets. If you only possess something but do not own it, you are not liable to
pay Zakat on it. Moreover, the assets must be in excess of your basic necessities. For instance,
household items such as furniture, dishware etc. are not considered Zakat-eligible assets –
unless you bought them with the intention of investment or sale.

If you’re not involved in agriculture, you are obliged to pay Zakat on the amount of cash you
own or have in your savings account, the value of gold or silver jewellery above the
mentioned threshold and the value of trading stocks at the given time.

If you have rented out your property, you also need to pay 2.5% Zakat on rental income if it
reaches the Nisaab and an entire lunar year has passed since the acquisition.

For salaried people, if your employer deducts provident fund at source, you are not liable to
pay Zakat on that amount until it’s released to you.

Furthermore, if you owe a debt to others, calculate and deduct that amount from the total
assets on which you are obliged to pay Zakat. These are called liabilities.

WHO IS ELIGIBLE TO RECEIVE ZAKAT?

The recipients of Zakat must not have cash or property above the Nisab threshold.

While you can pay Zakat to your relatives, you cannot give it to your immediate family
members, including your parents, grandparents, spouse and children. Moreover, the
descendants of the Prophet (Peace Be Upon Him) are also not eligible to receive Zakat.

These are the eight categories of Zakat recipients mentioned in the Holy Quran.

Fuqara: The poor and needy who do not own any assets in excess of basic necessities.

Miskins: The extremely poor people who do not even own enough to fulfil their basic
necessities.

Aamileen: The officials responsible for the collection and distribution of Zakat.
 Muallafat-ul-Qulub: This refers to underprivileged Muslims. You can give them Zakat for
the express purpose of making them more inclined towards Islam.

Fir-riqab: This term stands for ’emancipation of slaves.’ You can pay Zakat to free a
person stuck in a contract with a master who would only release them for a fixed sum
of money.

Al-Gharimeen: The Muslims who are in debt.

Fi Sabeelillah: For any good deeds that would please Allah.

Ibn-us-Sabil: If a traveller needs money while travelling, they are entitled to receive Zakat.

Case Study

Bay-al-mall

Bayt al-mal is an Arabic term that is translated as "House of money" or "House of

Wealth." Historically, it was a financial institution responsible for the administration of
taxes in Islamic states, particularly in the early Islamic Caliphate. It served as a royal
treasury for the caliphs and sultans, managing personal finances and government
expenditures. Further, it administered distributions of zakat revenues for public works.
Modern Islamic economist deem the institutional framework appropriate for contemporary
Islamic societies.

Establishment of bay-al-mall

Bayt al-mal was the department that dealt with the revenues and all other economical
matters of the state. In the time of Muhammad, there was no permanent Bait-ul-Mal or
public treasury. Whatever revenues or other amounts were received were distributed
immediately.In the time of Abu Bakr as well there was no treasury. Abu Bakr earmarked a
house where all money was kept on receipt. As all money was distributed immediately the
treasury generally remained locked up. At the time of the death of Abu Bakr, there was
only one dirham in the public treasury.

In the time of Umar, things changed. With the extension in conquests money came in
larger quantities, Umar also allowed salaries to men fighting in the army. Abu Huraira,
 who was the Governor of Bahrain, sent a revenue of five hundred thousand dirhams. Umar
summoned a meeting of his Consultative Assembly and sought the opinion of the
Companions about the disposal of the money. Uthman ibn Affan advised that the amount
should be kept for future needs. Walid bin Hisham suggested that like the Byzantines,
separate departments of Treasury and Accounts should be set up.

After consulting the Companions, Umar decided to establish the Central Treasury at
Madinah. Abdullah bin Arqam was appointed as the Treasury Officer. He was assisted by
Abdur Rahman bin Awf and Muiqib. A separate Accounts Department was also set up and
it was required to maintain record of all that was spent. Later, provincial treasuries were
set up in the provinces. After meeting the local expenditure, the provincial treasuries were
required to remit the surplus amount to the central treasury at Madinah. According to
Yaqubi, the salaries and stipends charged to the central treasury amounted to over 30
million dirhams.

A separate building was constructed for the royal treasury by the name bait ul maal,
which in large cities was guarded by as many as 400 guards. In most of the historical
accounts, it states that among the Rashidun caliphs, Uthman ibn Affan was first to struck
the coins, some accounts however states that Umar was first to do so. When Persia was
conquered, three types of coins were current in the conquered territories, namely Baghli of
8 dang; Tabari of 4 dang; and Maghribi of 3 dang. Umar ( according to some accounts
Uthman ) made an innovation and struck an Islamic dirham of 6 dang.

Zakat Tax

The concepts of welfare and pension were introduced in early Islamic law as forms
of Zakat (charity), one of the Five Pillars of Islam, under the Rashidun Caliphate in the 7th
century. This practice continued well into the Abbasid era of the Caliphate. The taxes
(including Zakat and Jizya) collected in the treasury of an Islamic government were used
to provide income for the needy, including the poor, elderly, orphans, widows, and the
disabled. According to the Islamic jurist Al-Ghazali, the government was also expected to
stockpile food supplies in every region in case a disaster or famine occurred. Thus,
 according to Shadi Hamid, the Caliphate can be considered the world's first major
"welfare state"

Federal Board of Revenue

The Federal Board of Revenue (FBR), formerly known as Central Board of Revenue
(CBR), is a federal law enforcement agency of Pakistan that investigates tax crimes,
suspicious accumulation of wealth and money-laundering. FBR operates through tax
inspectors that keep tax evaders under surveillance and perform special tasks for FBR
Headquarters. FBR has also inducted new blood, new strength of inspectors through FPSC
in 2016 whom FBR intends to promote soon or empower with assessment powers because
of their competence. FBR performs role of collection of taxation in the country from all
individuals and businesses. FBR also collects intelligence on tax evasion and administers
tax laws for the Government of Pakistan and acts as the central revenue collection agency
of Pakistan.

Functions

FBR is a semi-autonomous federal agency of Pakistan that is responsible for

enforcing fiscal laws and collecting revenue for the government of Pakistan. FBR has the
responsibility for (i) formulation and administration of fiscal policies, (ii) levy and
collection of federal duties, tax es and other levies, and (iii) quasi-judicial function of
deciding taxation cases and appeals. FBR primarily operates through its main collection
arms comprising Regional Tax Offices (RTOs) and Large Taxpayer Units (LTUs) across
the country. FBR has two major wings: the Inland Revenue & Customs. The Inland
Revenue Service (formerly known as Income Tax Department) administers domestic
taxation including Sales Tax, Income Tax and Federal Excise Duties and is the main
component of FBR. The Pakistan Customs Service administers import duties and other
taxes collected at import stage, as well regulates international trade with regard to
prohibitions & restrictions imposed by the government. For the purpose of collection of
revenue and pursuing tax evaders, FBR's powers & functions also include but are not
limited to: carrying out inquiries and audits/investigations into the tax affairs,
 commanding arrests, attachment as well as public auction of movable and immovable
assets of a non-compliant.

Current Taxation system

Pakistan's current Taxation system is defined by Income Tax Ordinance 2001 (for direct taxes)
and Sales Tax Act 1990 (for indirect taxes) and administrated by Federal Board of
Revenue (FBR).

Federal income taxes are administered by the Federal Board of Revenue. The period from July
1 to June 30 is considered as a normal tax year for Pakistan tax law purposes.

Direct taxes / Income Taxes

Corporate Income tax rates Currently, the Corporate Income tax rate is 29% for tax year 2019
and onwards whereas the corporate tax rate is 35% for Banking Industry for TY 2019.

In addition to Corporate Tax, there are other applicable income taxes including Super Tax,
Minimum Tax, and Tax on Undistributed reserves.

Generally, manufacturing business is taxable at Corporate Tax rate whereas trading business
and commercial imports business is taxable as "minimum tax". For example, 5.5%
withholding income tax is applicable on commercial imports and is payable at the import
stage. This 5.5% withholding tax will be considered as minimum tax and Corporate Tax is
also applicable, whichever is higher will be the tax liability, on this business.

Indirect taxes

Indirect tax or more commonly knows as sales tax is also applicable on supply of goods and
provision of services. Under the 18th amendment to the Constitution of Pakistan, the right
to charge sales tax on services has been given to the provincial governments where as the
right to charge sales tax on goods has been given to the federal government.
Consequently, provincial revenue authorities were created to manage and collect
provincial sales tax in their respective provinces.
Below is a summary of the applicable sales tax rates in Pakistan:

Sales tax on goods: 17%

Sindh Sales tax on services: 13%

Punjab Sales tax on services: 16%

Baluchistan Sales tax on services: 15%

Khyber Pakhtunkhwa (KPK) Sales tax on services: 15%

Islamabad Capital Territory (Tax on Services): 16%

Complementary relation of Zakat and taxes

Zakat and taxes have certain similarities.

1) In countries where Zakat is compulsory it is liable to be collected by force like tax, if the
payer does not pay it willingly.

2) Zakat, like tax, is paid though there is no direct and equivalent economic benefit obtained
by the payer; indirect the Zakat payer may expect return in the life hereafter and the tax payer
may receive some public service from the state in return, but there is no direct correlation.

There are also important conceptual and other differences between Zakat and tax: 1) Zakat is
permanent, cannot easily be eliminated by a governmental or legislative action. 2) Zakat has
fixed rates, exemptions and zakatable items cannot be altered. 3) Zakat has specific recipients
and cannot (unlike taxes) be used for other government objectives. 4) Zakat is enhanced by
religious zeal as a part of religion. If it is collected by the government it must be collected in
its name and designated for its recipients as an autonomous duty and operation.

The following arguments demonstrate why Islamic states require the imposition of taxes in
addition to Zakat and in which areas taxes even strengthen the Islamic state. 1 AlQardawi
(1999) as important religious scholar also mentions that evidence against taxes beyond Zakat

1
from the Hadith is either weak or not unequivocal, whereas the evidence in support of dues
other than Zakat from the Quran and Sunnah are very strong.

1) Islamic jurists widely agreed upon the genuine need for Muslim states that tax can be
imposed even after Zakat.26

2) Certain public goods and services are not provided by Zakat resources i.e. running of
general administration, infrastructure, security etc. This requires the imposition of
taxes beyond Zakat.

3) The general principle holds that ‘avoidance of damage will get priority over doing of
good’. If proper economic duties are not performed by the state due to lack of
resources, this will lead to serious public dissatisfaction and create violent situation. As
such, the state has to obtain required amounts of resources through taxes for carrying
out its duties.

4) Allah has made it obligatory to carry out Jihad (defence of Islam and Islamic territory
and to put an end to oppression anywhere in this world) through employing one's life
and wealth. This is a duty beyond Zakat. To carry out a major Jihad in this age, if
needed, there is no other way but to raise resources through taxes.

Therefore, Zakat alone cannot meet the need of general revenue and also the Islamic state
requires additional sources for funding public goods and services. Some scholars even argue
that a policy of levying zakat would even work against the poor, when what is needed is a
comprehensive and socially progressive tax policy, which is hampered or even neglected in
the sake of Zakat only.2

SWOT analysis

Strength

1 Purifies your wealth

2
It purifies your wealth as Allah says in the Qur’an:

It keeps one away from sin and saves the giver from the moral ill arising from the love and
greed of wealth.

Through Zakat, the poor are cared for; these include widows, orphans, the disabled, the needy
and the destitute.

2 Equal Distribution of Wealth

The main problem of modern economic system is unequal distribution of wealth which is
the main cause of social and economic problem. Islamic economic system solves this
problem with zakat in a good manner. Once government implement zakat, it will
automatically solve the problem of unequal distribution of wealth because the rich
people will give zakat to poor for consumption.

3. Circulation of Wealth

To gain economic development it is very important that any country’s capital should
circulate instead of accumulation. If capital goes towards accumulation the economic
activities will become slow. Zakat is the best tool to circulate the money in economy.

4 Economic Stability

Zakat avoids interest system. When the economy is prosperous the amount of zakat
increases among poor. All these bring a balance in economic condition.

5 Solution for Unemployment

Once Dr. Keynes said, the basic reason of unemployment is the shortage of an effective
demand. It is zakat through which unemployment decreased by increasing the level of
effective demand. In Islamic economic system unemployment allowance can be given
to unemployment persons.
 6. Capital Formation

Some people avoid using their income. Neither they take benefits of nor is any other
person to do so interest system, an attempt made to decrease their accumulation
through interest. But in Islamic economic system there is no such room for the
circulation of their accumulation except Zakat that discourages the accumulation of
wealth.

7. mportant Instrument of Fiscal Policy

There are three basics of government finance tax, expenditure and national loan. In Islamic
economy zakat is an important essential of government finance.

8. Protection of Needy Persons

FYIThere are different people living in a society, there are some people unable to earn and
depend on other for financial help through zakat. Such can be honorably protected with
necessities of life.

9. Absolute Source of Government income

Islmaic state is a welfare state that has to fulfill the responsibility of the society. For the
fulfillment of this duty there should be surety of National Income.

10. increase in Collective Welfare

Another economic advantages or benefit of Zakat is that It is the most basic source of
social welfare. In Islamic society zakat funds can be utilized in school and hospitals to
help poor. This promotes collective welfare of the society

Weaknesses

1, Distribution of zakat funds

 Zakat and Ushr in Pakistan is mainly spend on very targeted areas of support like
social welfare, education and health care for certain population groups. Other types of
public goods and services are not covered with funds received from Zakat. Therefore,
according to important religious scholars the Islamic state requires additional revenues
to cover all necessary demands of its population. One option to collect additional
revenues is taxation.

2, Lack of awareness

Lack of investment from business to pay zakat perniagaan because they are more
willing to pay for tax rather than zakat

3 Miss use of zakat funds

some time zakat funds are not distribute to a rigjt hand. its is just because of miss
managememt. so we shuld mantain a proper system to deliver zakat funds in right
hands

Opportimities

1 Increase awareness to pay zakar fitrah against tax

2 Make a good managemet system to distribute zakat funds in a right hand

Threat of not paying zakat

1 Unequal Distribution of Wealth:

The main problem of modern economic system is unequal distribution of wealth which is
the main cause of social and economic problem. Islamic economic system solves this problem
with zakat in a good manner. Once government implement zakat, it will automatically solve
the problem of unequal distribution of wealth because the rich people will give zakat to poor
for consumption

■ Rights of Needy Persons

There are different people living in a society, there are some people unable to earn and
depend on other for financial help through zakat. If we don’t pay zakat then the poor and
needy persons couldn’t fulfill the basic necessities of life.
■ Promote Interest System

Islam is highly against the interest system.When people don’t pay their zakat then poor
people borrow money with others on interest. So, with the help of Zakat ,We can also get rid
from Interest system

4 Poverty

If people don’t pay their zakat then their will be a chance of increase of poverty.

■ Unemployment

Less job opportunities & business activities can create a lot of social evils like robbery ,
criminals , smuggling etc

Analysis of tax

Conclusion and recomendation

In conclusion we were able to show that Zakat plays an important role in many Islamic
oriented countries with mandatory and voluntary government systems, but also for those
without formal governmental Zakat system. Zakat and Ushr in Pakistan is mainly spend on
very targeted areas of support like social welfare, education and health care for certain
population groups. Other types of public goods and services are not covered with funds
received from Zakat. Therefore, according to important religious scholars the Islamic state
requires additional revenues to cover all necessary demands of its population. One option to
collect additional revenues is taxation.

Finally the different types of individual giving increase the total amount paid to formal and
informal taxation systems in Pakistan by about 1%, which is an increase of 12% of the current
tax to GDP ratio of 8.6%. Nevertheless the official tax to GDP ratio does not change, because
Zakat is statistically classified as social assistance benefits, which do not become part of the
tax to GDP indicator. Even if Zakat payments as informal taxation system do not formally
increase the tax to GDP ratio, the (informal) tax burden for taxpayers does exist.