The Difference between Zakat, Conventional and Islamic Taxation

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1. Introduction Government enhances the operation of the market system by providing an appropriate legal foundation and promoting competition. Government also provides certain goods which there are non-rivalry in consumption and non-excludability of benefits. Many quasi-public goods also provided by the government because of their large external benefits. To finance those goods and services businesses and households are required to pay taxes. Taxation is among the ways in which government can lessen income inequalities. Taxes are done in order to correct the over allocation of resources associated with negative externalities. Taxation is a method of transferring resources from the private to the public sector. In the early centuries of Islamic State, only Zakat was collected from Muslim and Islamic Tax was introduced by Caliph Umar Al-Khattab which is imposed to non-Muslim. The purpose of this report is to differentiate between conventional taxes and Islamic taxes. 2. Types of Conventional Tax, Zakat and Islamic Tax a. Conventional Tax Tax is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. Government imposes many types of taxes. For example, personal income tax, corporate income tax, payroll tax, sales tax and property tax. Type of Tax Meaning Personal income tax The households or an individual which is levied. Payroll tax Workers pay the full tax levied on their earnings and part of the tax levied on their employer. Corporate income tax Depends on a short-run (SR) or long-run (LR). In SR, full taxes fall on employers, while in LR it falls on workers by having lower wages. Sales tax ... ... middle of paper ... ...publications/zakat-information/what-is-the-meaning-of-zakat 3. 4. 5. 6. 7.,%20expenditure%20and%20debt.ppt 8. 9. 10. 11. 12. 13. Simon James and C. Nobes (1997/1998) The Economics of Taxation: Principles, Policy and Practice, sixth edition, Europe 14. McConnell, Brue and Flynn (2009) Economics, Eighteenth Edition, New York, America

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