Articles on Islamic Economics

Zakat and Protection of Poor from Inflation


Qanit Khalilullah

Manager Finance, Gul Ahmed

In economic policy discourse, inflation is given prime emphasis in comparison to providing employment. However, we need to understand that as a result of inflation, if one party of the transaction i.e. buyer is suffering due to high price, the other one, who is the seller, gets benefit of this situation.

Similarly, borrower of money who is usually having deficit of funds benefits from inflation due to reduction of real value of debt. Even a businessperson who has taken loan benefits since increase in output price increases revenue while reducing the real value of debt owed to the lender. In this case, the lender incurs a loss in real terms.

Neoclassical economists usually do not favour government intervention in terms of price control because it distorts the market mechanism of achieving equilibrium through interaction of forces of demand and supply. It distorts price signals which ensure efficient utilization of economic resources.

In case of increasing prices and profits in an industry, more producers would step in to earn higher profits. As a result, the production would increase, and prices will ultimately settle down. In case of interference through price controls and subsidies, this mechanism would not work and will result in waste of precious economic resources.

The Holy Prophet (PBUH) refused price fixation and control. “The people said to Prophet (PBUH): Prices have shot up, so fix prices for us. Thereupon the Apostle of Allah said “Allāh is the one who fixes prices, who withholds and gives abundantly to others. I hope that when I meet Allāh, none of you will have any claim on me for an injustice regarding blood or property”.

Qur’an says: “Oh ye who believe! Do not devour one another’s possessions wrongfully; rather, let there be trading by mutual consent” (Chapter Nisa: 29). Fuqaha and scholars argue that price fixation would negate mutual consent which is the essential characteristic of lawful trade, therefore, it is not allowed. The majority of the scholars agree on the above mentioned principle, and according to them only in the case of injustice being done to the public by hoarders and businessmen, the government can intervene to fix the prices of commodities for the welfare of the people and to safeguard the public interest.

On the other hand, Zakat helps poor to meet their essential needs even in an inflationary environment. Contrarily, higher indirect taxation results in inflation. However, Ushr, which is a form of Zakat would produce results otherwise by helping poor and needy people who are affected the most from inflation.

Ushr is applicable on value of production at a relatively lower rate of 5% or 10% compared to general Sales Tax (GST)/Value Added Tax(VAT). It is simple from the perspective of calculation and implementation as compared to modern forms of indirect taxation.

Despite the fact that its rate is much lower than 16%/17% of GST, it would fetch more amount because it has no complicated requirement of input tax adjustment like GST.

More importantly, it would be collected to support the poor class by meeting their basic needs instead of creating inflation for them like an indirect tax (GST) does, and therefore, is considered an adverse tax.

Allama Ibn-e-Khuldun had showed that tax rates and tax collection have a non-linear relationship. It is not necessary to maximize the tax rate to maximize revenue collection.

A low, stable and consistent tax rate is considered conducive for the economy in order to encourage private investment and ensure sufficient revenues for the government to maintain law and order and provide public goods. By introducing lenient tax rate on production and wealth, private investment will be encouraged which can enhance the supply of goods and thus reduce any cost-push pressures on inflation. If Zakat on real estate is implemented except the residential unit or office/factory in use, an important component of inflation, which is rise in cost of housing can also be checked.

2 replies »

  1. With due respect: The article may kindly be reviewed in the light of Nabvi and Khilafat period’s Economic System to learn the Sunnah’s treatment of Zakat. Period of Umer Ibn-e-Khattab is very important. Today Zakat is being placed simultaneously with Tax. Who invented this system, please educate me. Regards.

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    • Zakat and tax are different. But, some scholars have allowed adjustment of Zakat in tax on the premise that government can only take Zakat from the public. If it has taken anything else in the name of tax, it shall either return or adjust the Zakat liability. However, most contemporary scholars allow tax as long as they are taken by dictators for their own benefit. Such taxes by despotic kings of past were condemned in Ahadith. Regarding Zakat, most scholars do not allow treating Zakat liability same as tax on the premise that Masarif-e-Zakat are particular and it is important to ensure Tamleek (ownership) to a Mustahiq person who falls under Masarif-e-Zakat. On the other hand, Government levies tax on not necessarily Sahib-e-Nisab only and allocates it on general things.

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