ZAKAT (tithes) and taxes are important sources of income for the Islamic economic system.
Zakat is the third pillar of Islam. It can be defined as the act of cleansing or purifying something.
From a legal aspect, zakat is the legal transfer of ownership of wealth to an individual under specific conditions.
It means the collection and distribution of zakat is considered a form of wealth distributed by syariah to achieve various ends.
The distribution of zakat is restricted to eight categories of recipients as stated in the Quran.
There are two types of zakat: zakat fitrah and zakat al-mal.
Today, zakat contribution is considered a voluntary obligation in most Muslim countries. However, in some countries, zakat is mandated and collected by the state.
Malaysia is one of the countries where zakat contribution is voluntarily paid to a zakat institution.
Malaysians who pay zakat get tax rebates. This is to provide relief for Muslim taxpayers from being burdened by double taxation.
In general, a tax rebate offers a taxpayer a form of tax relief.
The income tax on the chargeable income is reduced by the rebate.
The rebate is granted before any offset takes place under Section 110 and any credit under Section 132 or 133 of the Income Tax Act (ITA) 1967 is allowed.
There are two types of rebate applicable to an individual:
THE rebate for self and wife, which is stated under Section 6A (2) of the ITA; and,
THE rebate for zakat fitrah or other Islamic religious dues that are stated under Section 6A (3) of the ITA.
Zakat rebate on individual income tax is granted only when it meets the following conditions:
MUSLIMS individuals must make zakat payments to zakat institutions. It means that the zakat given directly to asnaf (hardcore poor) cannot be claimed as a zakat rebate;
ZAKAT payment receipts given by zakat institutions must be in the name of the individual, except for the zakat fitrah receipt;
THE types of zakat that is eligible for the rebate is referred to all types of zakat that must be paid by the individual in the following year of assessment such as zakat fitrah, business zakat, zakat gold and silver, zakat of the Employees Provident Fund, zakat of agriculture and zakat of livestock;
THE zakat payment receipt must be kept by the taxpayer for seven years as set forth under Section 82 of the ITA (1967);
THE zakat rebate is to be charged based on the date zakat was paid in the year of income tax assessment. For example, if a Muslim paid zakat in 2011, the zakat rebate can be claimed only in 2011; and,
THE amount of zakat is limited to the amount of income tax in the year of assessment. The unpaid zakat balance cannot be brought to the next year. The greater the amount of zakat paid, the less the amount of tax payable. If the amount of zakat is equal or exceeds the tax payable, then one does not have to pay the income tax.
Although the zakat rebate reduces the tax collected by the country, it has a positive socio-economic impact.
The collection of zakat will be distributed to eight groups of needy people.
They include muallaf (converts), gharimin (those in debt) and fi sabilillah (those working for Islam or for general good).
This helps the government eradicate poverty and improve the standard of living of the people.
For example, zakat is distributed to students from low-income families. This is in line with the government’s goal of making higher education accessible to more people.
Zakat, as a tax rebate, can reduce the burden of Muslims.
Faculty of Economics Muamalat,
Universiti Sains Islam Malaysia, Nilai, Negri Sembilan