Professional Documents
Culture Documents
Fiscal Policy:
A government policy for dealing with the budget (especially with taxation and borrowing
The Fiscal Policy of the Islamic State basically has the same objectives as that
of the secular state. They are as follows:
(i)
(ii)
(iii)
Eradication of unemployment.
Equitable distribution of wealth.
Economic stability. Faster economic progress.
(iii)
Abedeen Salama mentions the following four objectives of an Islamic fiscal and monetary
policy:
I.
Resources Allocation
1. Economic stability
2. Acceptable growth rate
3. Just distribution of income and wealth
F.R. Faridi identifies the Following four objectives of Fiscal Policy.
1. Fulfillment of the social and economic needs of the socie and achievement of social and
economic well-being.
2. Economic progress.
3. Evolution of the social structure
4. Justice and Equity.
poor and the destitute. Zakat, therefore, cannot be freely expended as a matter of Policy Control
in order to achieve the objectives of Islamic Fiscal Policy.
Furthermore Zakat must be expended in the same area from which it is
collected. If, however, a surplus remains after supplying the wants of the deserving people of the
area, it can be transferred for expenditure in other areas.
Imam Abu Ubaid in Kitab-al Amwal narrates:
When the Apostle of Allah (S.A.W) sent Hazrat Muad (RA) to Yemen, he took up residence in
Jind. After the death of the Messenger of Allah (S.A.W) and Abu Bakr (RA), he.came to Hazrat
Umar (RA) who sent him back to Yemen. Hazrat Muad (RA) forwarded one-third of the Zakat
collection to Hazrat Umar (RA)
Monitory Policy:
Monetary policy has to be as important an instrument of public policy
in an Islamic economy as it is in its capitalist counterpart. The objectives and tools must,
however, be different because of the differences in the goals and the nature of the two systems
and because of the prohibition of interest in Islam while it is a key ingredient in the capitalist
system.
The Role
There can be no question that monetary policy in an
Islamic economy should not only be in conformity with the ethos of Islam but should also help
realise the socio-economic goals that Islam emphasises. Some of the most important goals may
be briefly stated as:
1. 1 .Economic well-being with full employment and optimum rate of economic growth;
2. Socio-economic justice and equitable distribution of income and wealth; and
3. Stability in the value of money to enable the medium of exchange to be a reliable unit
of account, a just standard of deferred payments and a stable store of value.
It may be argued that the goals of monetary policy in the Islamic economic system, as
stated above, are the same as those of capitalism. Such a statement would not be correct because
even though there is an apparent similarity; there is in fact a significant difference in emphasis
arising from the divergence in the commitment of the two systems to spiritual values, socioeconomic justice and human brotherhood. The ensuing discussion should make this point clear.
Zakat :
Zakat is the only tax an Islamic government can impose upon its Muslim
citizens. It is not merely a charity fund but can be spent on the collective needs of the people as
well.
Purpose Of Zakat:
The zakat money can be used to pay the salaries of all government
officials including that of the head of state, to build all works of public interest, to cater for
defense requirements and to establish an Islamic system of Insurance. In short, the system of
zakat envisaged by the Quran and Sunnah totally meets the requirements of running a welfare
state.
History Of Tax:
Taxes were, probably, first imposed in ancient Palestine. The secession of the ten
tribes of Israel as recorded in the Biblical Book of the Kings was to an important extent a
response to punitive taxation. The ancient empires of Egypt and Babylon obtained revenues from
public lands and extracted levies in kind, in the form of forced labour and personal servitude or
as a share in the produce of private lands. In Athens, at the time of Pericles, taxes were imposed
largely on foreigners and slaves. One who was taxed but failed to pay was guilty of a capital
offense. In Rome, along with custom taxes and custom duties, there were certain direct taxes.
The principal of these was the tributum paid by the citizens and usually levied on as a head tax;
later when additional revenue was required the base of this tax was extended to real estate
holdings. In the reign of the emperor Augustus (27 BC--14 AD) land and inheritance taxes
became a familiar aspect of Roman economic life. Subsequent emperors raised rates and
included more and more objects in taxable items: wheat, barley, oil, meat, wood, salt, sales,
bachelors and even urinals.
As the Western civilization moved into agrarian feudalism, the principal
source of revenue of the governing feudal lord became the rents paid by his vassals in exchange
for Military protection he gave them. The Normans brought this system to England in 1066.
When King John (1167-1216) tried to enlarge royal power and income with new levies, the
feudal nobility rose against him. In 1215, when the barons imposed the Magna Carta on the king,
the first principle of modern taxation arose: taxes are to be imposed only by the consent of the
governed. It was, however, centuries later before this right came to be formally established---and
that too to no avail.
Middle ages
During the middle ages, kings derived most of their income from their feudal holdings, and
generally needed to levy taxes only to pay for their extensive wars. Because, ordinarily, such
taxes could be collected only with the consent and aid of the nobles and other large landholders,
monarchs found it necessary to call these landholders into session to approve such taxation.
These sessions of landlords subsequently evolved into parliaments and other legislative bodies.
In 1628, the petition of rights deprived the crown of Britain to levy taxes without the consent of
the parliament. However, this right, though contributed to a marginal development for the
citizens of Britain, subsequently started a bloody struggle elsewhere: The American Revolution
was triggered by public resentment over the Stamp Act imposed by the British Parliament in
1765, after the Seven Years War. Requiring the colonists to pay fees to Britain, this act called
forth protests against taxation without representation and was subsequently revoked by the
British Parliament. However, tariff duties imposed thereafter on tea and other articles rekindled
the protest. The ensuing Boston Tea Party hastened the advent of the American Revolution. A
similar story may be told about France. Taxation during the years preceding the French
Revolution had become exceedingly heavy with burdensome levies collected by both the king
and the church. The Taile, initially a broad based tax on the value of income from land, had
come to be primarily a tax on the poor farmers, with the nobility, the clergy and the wealthy
largely exempted. A regressive system of customs and excise duties also imposed a heavy
burden falling primarily on the poor. The taxes were used for financing lavish court
expenditures. It is not surprising, therefore, that taxes became a major dissatisfaction with the old
regime that culminated in the French Revolution of 1789.
Principals Of Zakat:
. We shall discuss the principles of this institution set forth by the Qurn and
Sunnah in three sections:
(1) The Nature of Zakat.
(2) The Heads of Zakat.
(3) The Rates of Zakat.
single penny can be further exacted from him. This is further illustrated by the following two
traditions
There is no [legal] share [for the society] in the wealth [of people] except zakat. (Ibni Maajah:
Kitab-uz-Zakat)
and
After you have paid the zakat of your wealth you have paid [all] that was [legally] required of
you. (Ibni Maajah: Kitab-uz-Zakat)
In this regard, the severe warning sounded by the Prophet (saws) to those who impose taxes
other than those ordained by the Almighty must also be kept in mind:
No tax-imposer shall enter paradise. (Abu-Daud: Kitab-ul-Khiraj)
be extended to include other recipients. For example, prisoners of war and other prisoners who
are unable to pay the fine imposed by the courts can be freed by giving money through this head.
5) Those inflicted with losses (Ghaarimeen): Under this head, an Islamic system of Insurance can
be established and all those who are inflicted with economic losses can be compensated.
Whether rich or poor the real criterion is that their means of living and its role in the national
economy have been destroyed. People who have acquired a loan and are unable to pay it back
may also be helped from this money so that they may start afresh and the society can benefit
from their abilities.
6) In the Way of Allah (Fee Sabeelillaah): Under this head defence expenditures of a state can be
met and institutions for religious propagation as well as all works of public interest like roads,
bridges, mosques, hospitals, educational institutions and libraries can be built.
7) The Wayfarer (Ibnussabeel): This implies the welfare of the wayfarer. Circumstances often
make a traveller a needy person, in which case, his needs can be fulfilled from this head.
ii) 10%: On items which are produced such that the major factor in producing them is either
labour or capital, but not both. Examples of the former include an artists creation like paintings
and the works of scholars and intellectuals, while examples of the latter include rented houses,
and produce from rainy lands.
iii) 20%: On items which are produced neither as a result of labour nor capital but are actually a
gift of God, eg treasure etc.
3. Animals: Only those animals which are bred and reared for the purpose of trade and business
are subject to zakat. The details of the rates of zakat on animals can be consulted from any book
of fiqh.
This is the concept of zakat envisaged by the Qurn and Sunnah. From the above
details it is clear that zakat is the only tax which an Islamic government can impose on its
Muslim subjects and that it is not merely a fund for the destitute. Moreover, since there is
no basis for necessarily giving it in the possession of an individual. it can be spent on the
collective needs of the people as well.
Public Expenditure:
1:The theory of public expenditure in Islam is related to the notion of maslahah
(public interest). It is the maslahah of Islam and of God's creatures that governs all decisions
regarding expenditure. The general principles of public expenditure in an Islamic economy can
be summed up as follows:
2: All expenditure should follow the criteria of the maslahah of the ummah.
Removal of hardship should take precedence over provision of ease. The interest of the majority
should take precedence over the interest of the minority. If there is a conflict between a private
interest and public interest, public interest should prevail. If there is a^ option, greater loss or
sacrifice should be avoided by preferring a smaller loss or sacrifice. Whoever receives a benefit
should also pay for the costs. Something without which an obligation cannot be fulfilled is itself
on obligation. To these general principles we shall add the following: Public expenditure will
follow the hierarchy of needs, giving top priority to daruriyydt (essentials), followed by hdjiyydt
(complementaries) and tahslniyydt.
3: This is based on the Islamic concept of maslahah. The concept of maslahah
remained in its rudimentary form in the writings of early jurists until Abu Hamid al-Ghazali
developed it into a mature concept. Al-Ghazali stated that the ultimate purpose of the SharVah
was to further the maslahah of the ummah. In-its most basic form it meant protection of five
things: life (nafs), religion (din), progeny (nasl), reason ('aql), and property (mat). Since his time
it is generally agreed that the protection of these five things is the major purpose of the SharVah.
The concept of maslahah was further developed by Abu Ishaq al-Shatibi Both Ghazali and
Shatibi divided the masdlih into three categories of essentials (daruriyyat), complementaries
(hajiyydt) and desirables (tahsiniyyat). There should be no waste or extravagance in the public
expenditure.
4 The public expenditure should not lead to the creation of assets and facilities which
remain un-utilised or under-utilised for long periods.
5 The government should avoid all unnecessary expenditure, especially expenditure
on display of grandeur and pageantry. Conspicuous consumption is not only deplorable for an
individual but is also undesirable for the government.
6 The government should not indulge in nepotism, favouritism and discrimination on
grounds of ethnicity, sex, caste or creed in matters relating to public expenditure.
7 The government should show due regard for inter-regional
8 inter generational
9 equity in its public expenditure. In matters of income transfers, the government
should act speedily and avoid red tape.
10 The government should remain accountable to the people and to God for each
penny spent or withheld by it. which must be safeguarded at every cost; they are life, religion,
progeny, intellect and property. It is the primary duty of the government to do so. The
complementaries and desirables vary with social and economic conditions. They are to be
protected after the primary duty of protecting the essentials has been accomplished. In case of
trade-off, the three categories of interests will be fulfilled in the order mentioned above. All the
three categories of maslahah pertain to human needs and the jurists are generally agreed that the
government should strive to protect them. These categories are interrelated and complement each
other. Therefore, all the three categories should be protected. For the purpose of maslahah of the
Hereafter, we must take into account the masdlih of this world.
A present-day Islamic state will have to perform certain mandatory functions such as
the following: Defence; Maintenance of law and order; Dispensation of Justice; Need
fulfilment;11 Communicating the message of God; Enjoining right and forbidding wrong (al-amr
WlmaWuf wa al-nahy 'an al munkar); and Civil administration.
Furud kifayah
(singular fard kifayah) are the duties that are mandatory upon the Muslim
community as a whole so that if some individuals perform them, the rest are exempt. But the
point is that the task must somehow be carried out, irrespective of the fact who carries it out.
There is no final list of such tasks but the jurists have been defining them from time to time
according to their perceptions of the social needs. The examples of furud kifayah are: building
mosques, setting up schools, providing food and clothing to the poor, establishing industries, etc.
Furid kifayah can be carried out by individuals as well as groups of individuals and
organisations. In the present age, non-government organisation (NGOs) can also carry out those
tasks. Examples of the NGOs operating schools, hospitals, orphanages are too common to need
any detailed mention. Government should engage in certain activities to fulfill fard kifayah when
it is found that individuals and voluntary organisation have failed to perform tasks of vital
significance from the vantage point of collective interest. One such case can be to set up certain
industries which are critically important, but which people 11 It is important to note that the
state's responsibility towards need fulfillment is only of a residual nature. The primary
responsibility in this regard lies on a person himself, then on his family and relatives, and only if
there is no one to look after that person that the state will be required to play its role. have failed
to establish. It could also be to meet a social need such as setting up orphanages or hospitals. It
could also be to provide the services when people are not forthcoming due to the potential free
rider effect, such as environmental protection or provision of roads or other utilities. The
government initiative could embrace such praiseworthy works of religious and moral merit as
building mosques, providing grants for marriage, or arranging the burial of those who have no
legal heirs
Specifically Assigned Tasks
It is possible that some specific tasks may be assigned to the government. The
government, in such cases, would receive the mandate to collect taxes for such an expenditure
and with the help of these taxes it is supposed to carry out these tasks. This is an open-ended
category and depends on the larger concept of the maslahah of the ummah.
Stabilisation Programme
Some public expenditure may also be necessary for stabilizing the economy. In
times of low effective demand, the government may undertake an expansionary fiscal policy in
order to stimulate demand. Criteria for Public Expenditure One of the important questions about
public expenditure is: how do we decide about the expenditure that should be undertaken in
preference to others, since the resources are never going to be enough to satisfy all demands? A
capitalist economy is guided in its decision-making by the cost-benefit analysis. This analysis is
based on the concept of time value of money. The government ranks different projects according
to their net present values by discounting their costs and benefits over the estimated lives of the
projects. The projects with higher net present values or higher internal rates of return (IRR) are
selected in preference to others. The cash flows are discounted at a certain rate of interest. In
view of the above, the question arises: how will an Islamic government rank its capital projects
since it does not accept interest as a valid tool for analysis? Some Muslim economists have
argued that discounting is an analytical tool, which uses interest as a measuring rod. Using it to
analyse projects should be acceptable, bearing in mind that this is simply a technical, evaluative
exercise which does not entail, in actual practice.
2.Economy:
Although the aim of public expenditure is to maximize the social benefit, yet it does
not exonerate government from exercising utmost economy in the expenditure. Economy does
not mean niggardliness. It only means that over-spending and misuse of all kinds must be
evaded.
3. Canon of Sanction.
An added significant principle of expenditure is that prior to it is in reality
sustained, it must be authorized by a expert power. Unofficial spending is bound to lead to
profligacy and misuse
4 Canon Of Elasticity
Another sensible principle of public expenditure is that it must be reasonable flexible
.It Ought be achievable for public establishment to fluctuate the expenditure as per requirement.
5 Balanced Budget
Ever-recurring deficits in the budget should be avoided .Every effort should be made
to balanced a budget .A sensible state is expected to cut its coat according to its cloth.
In the early days of the Government of the Islamic State, Islamic public finance and fiscal policy
has not much role in economic activity .. not run fiscal policy as carried out in the analysis of
fiscal policy today, because I have found no state income at the time. Prophet Muhammad and
his staff did not receive the usual salary of a government. Government revenue derived only
from public donations. Zakat not required at the beginning of the Islamic government. If the
Prophet need of funds to help the poor and needy, then the usual Bilal borrowed from the Jews.
Another source of revenue for the government at the beginning of the year was property derived
from the spoils of war, and this was allowed to become one of the government's financial
resources after the decline in surah al-Anfal (Sura 8:41) in the second year Hijri. Furthermore in
the second year Hijri Zakat Al-Fitr is a duty that must be paid by every Muslim, and this later
became one of the government's financial resources.
Other financial resources derived from the poll tax paid by non-Muslim groups, especially the
scribes, which guarantee the protection of life in the Islamic government. Other sources are
kharaj (land tax levied on non-Muslims), ushr (import) charged to each merchant and is paid
only once a year and is valid only if the value exceeds 200 dirhams trade.
With time and began gathering the financial resources, the government began to finance various
expenditure is mainly used to maintain the existence of the state. For example to finance defense
expenditures, debt payments, aid to travelers, salary payments to guardians, teachers, and other
state officials.
Only then, down the provisions of paragraph concerning zakat fund expenditures to the eight
groups, as stated in the letter at-Tauba Sura 60 verse. With this revelation the fiscal policy was
clearly specifying the types of expenditure that can be used on existing charity funds. The use of
zakat funds outside the provisions set by the verse is not in accordance with the provisions of the
Koran. There was clear how Islamic economics is very concerned at the poor, the degree of life
needs help and was appointed to a decent level.
Reviewed the public finance side of the collecting and spending zakat funds can be viewed as
activities for the distribution of income more equitable. Islam does not want the rest of the
property in the hands of someone. If the property has enough nisabnya, then Zakah must be
issued. Thus here there was no effort to encourage people to rotate into the system property
economy, which can generate growth.
With the rise of Islam, which is reflected by the extent of the Islamic government territory, the
role of public finance activities increasingly important. Through the institution of zakat
collection Amil is a charity fund-raising model that is at that time. Institution Baitul Maal is
Suggestions
Abolition of interest has become the hallmark of Islamic Economics in modern times. Here lies
the greatest challenge for Islamic economists: to justify it by a fresh analysis of money and its
role in the economy, and present an operational model of interest-free banking which may
convince modern man that Islam's economic system based largely on the twin principles of
Zakah and abolition of Riba is more just and more efficient than any other alternative. They have
been quite aware of this challenge and their response has been vigorous. The idea of interest-free
banking has already entered the stage of experimentation after a quarter of a century devoted to
model building. It is now receiving attention not only from trained economists but also from
professional bankers and from governments. It is advisable that the existing interest-free
institutions provide relevant data and report their problems for analysis and careful consideration
by economists. In money and banking, more than in any other area in economics, practice leads
theory.
Meanwhile, the entire area of non-bank financial intermediaries, of near-money, of transactions
in foreign currencies and the vital subject of international monetary organisation awaits the
attention of Islamic economists.