RELIGIOUS OBLIGATION VS STATE OBLIGATION: A COMPARATIVE ANALYSIS
Zakat is something Muslims believe they must do because of their religion, while tax is something the government requires everyone to pay. Even though they’re different, both are collected by the same group, Zakat, Tax and Customs Authority (ZATCA).
Zakat, deeply rooted in Islamic teachings, is viewed as a sacred duty incumbent upon every eligible Muslim. It embodies the principle of wealth redistribution and societal welfare, with its collection and distribution overseen by religious authorities. In contrast, tax is a statutory requirement imposed by governmental bodies to generate revenue for public expenditure and governance. While both zakat and tax contribute to the state’s financial resources, their underlying purposes and mechanisms diverge significantly.
Despite these distinctions, the collection and management of both zakat and tax fall under the purview of ZATCA, ensuring uniformity and efficiency in fiscal administration. This convergence underscores the interconnectedness between religious principles and state governance within the realm of fiscal obligation.
AVENUES OF SPENDING OF ZAKAT AND TAX
The core concept of Zakat suggests it’s meant for the poor. Islamic law outlines the avenues for Zakat expenditure, specifying eight classes of beneficiaries, including the poor and needy, as mentioned in the Quran. The KSA government adheres strictly to Islamic law when spending Zakat funds.
In contrast, tax serves as a revenue source for the government, with allocation decisions made by government agencies. While some tax revenue is used for well-being purposes, other avenues of expenditure exist as well.
WHO IS SUBJECT TO ZAKAT AND TAX?
ZAKAT:
Generally, non-Saudi investors are liable for income tax in Saudi Arabia. In most cases, Saudi citizen investors (and citizens of the GCC countries, who are Saudi citizens for Saudi tax purposes) are liable for Zakat, an Islamic assessment. Where a company is owned by both Saudi and non-Saudi interests, the portion of taxable income attributable to the non-Saudi interest is subject to income tax, and the Saudi share goes into the basis on which Zakat is assessed.
TAX:
According to the income tax law, the following persons are subject to income tax:
- A resident capital company with respect to shares owned either directly or indirectly by non-Saudi / non-GCC persons and persons operating in oil and hydrocarbon production, except for the following (in which case the underlying resident company would be subject to Zakat:
- Shares owned in a resident capital company listed in the Saudi stock market acquired for the purpose of speculation through trading in the Saudi capital market.
- Shares owned either directly or indirectly by persons working in the field of oil and hydrocarbons production in a resident capital company listed in the Saudi stock market, and the shares owned either directly or indirectly by these companies in capital companies.
- A resident non-Saudi natural person who carries on activities in Saudi Arabia.
- A non-resident person who carries out activities in Saudi Arabia through a Permanent Establishment (PE).
- A non-resident person who has other income subject to tax from sources within Saudi Arabia without having a PE.
- A person engaged in natural gas investment fields.
- A person engaged in oil and other hydrocarbon production.
RATE OF ZAKAT AND TAX
Zakat, a pillar of Islamic finance, is levied at a rate of 2.5% on certain assets possessed by eligible Muslims. This rate is calculated based on specific types of wealth, such as savings, investments, gold, and agricultural produce, exceeding a minimum threshold known as nisab. The 2.5% rate is applied annually to the value of these assets, with the intention of redistributing wealth and aiding the less fortunate within the community. Zakat rates and the assets subject to Zakat are defined in Islamic jurisprudence, ensuring consistency and fairness in its application.
In contrast, taxes imposed by governments vary widely depending on factors such as income level, type of transaction, and jurisdiction. The tax rate can range from negligible amounts to substantial percentages of income or transactions. For instance, income tax rates often depend on income brackets, with higher earners typically subject to higher tax rates. Similarly, sales taxes or value-added taxes (VAT) are applied as a percentage of the transaction amount, commonly ranging from single digits to over 20% in some countries. For businesses and individuals in Saudi Arabia, understanding the intricacies of VAT is crucial, and many turn to professionals who specialize in VAT Services in Saudi Arabia for guidance.
In the context provided, the tax rate mentioned is 20%. This rate indicates the percentage of taxable income or transaction value that individuals or businesses are required to pay to the government. Tax rates are determined by legislative bodies and can be adjusted periodically in response to economic conditions, fiscal policy objectives, and other factors influencing government revenue needs.
In summary, while Zakat is mandated at a fixed rate of 2.5% on specific assets according to Islamic principles, tax rates are variable and subject to legislative decisions, with the rate mentioned here being 20% for illustrative purposes.
BASIS OF CALCULATION OF ZAKAT AND TAX:
- Zakat is calculated on net-worth of a business. i.e. Zakat base. Zakat base represents the net worth of the entity as calculated for Zakat purposes.
- Whereas income tax is calculated based on annual taxable income of business. If there is no income, no tax would be payable, and losses would be allowed to carry forward.
Mechanism for calculation of Zakat and taxation. In accordance with Article (14) of the Zakat regulations issued by Ministerial Resolution No. (2216) dated Rajab 7 1440H: “Where Zakat Payer’s fiscal year is not matching Hijri year Zakat should be calculated on the number of days basis by dividing two and a half percent (2.5%) by the number of days of Hijri year multiplied by the actual number of days of Zakat Payer’s Zakat Year except for net adjusted profit which shall be subject to Zakat at two and a half percent (2.5%) for any fiscal period. Accordingly, Zakat for calendar fiscal period, long or otherwise short period upon the commencement of business activity, change of fiscal year or otherwise transfer of sole proprietorship’s ownership, shall be calculated on the foregoing basis.
GENERAL FORMULA
(2.5%/Days of Hijri Calander year)* Actual number of days of zakat payer’s Zakat year
Whereas income tax is calculated on tax base. Tax base is profit/loss of a company calculated after incorporating adjustments in accounting profit, as provided in corporate tax law.
WITHHOLDING RULE:
As such Zakat is not governed/collected through withholding rules. Whereas corporate income is also governed and collected through withholding rules applicable in a state.
TAX CREDIT FOR ZAKAT AND TAX:
There is no tax credit for Zakat whereas a taxpayer business can claim tax credit for taxes already paid on the said income during a tax year.
FINAL THOUGHTS
As mentioned above, Zakat is basically law of God whereas tax is a law of land which is man made. The only commonality between Zakat and tax is that it is collected by same authority which is ZATCA. Whereas these are two different types of taxes having different basis of calculation, rate of calculation, different spending purposes. Zakat and tax are two distinct types of obligations applicable on two different segments of economy. Both laws have different basis of exemptions as well.
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