Zakath is a direct tax that Islam has imposed upon every Muslim who has annual net wealth exceeding the threshold. Income tax is also a direct tax that the government imposes on every person who has an annual net income exceeding the threshold.
It is clearly evident from the definition that both Zakath and tax have similarities as well as differences. This article aims at giving readers a comparative understanding of Zakath and the tax system as the Muslims traditionally pay their Zakath during this month of Ramazan, which is the ninth month of the Muslim (lunar/Hijri) calendar, which is 354 days while the Gregorian calendar is 365 days.
It is important to note that this article is based on the legal and practical context of taxation prevalent in Sri Lanka adhering to more authentic Islamic jurisprudential perspectives in case of divergent interpretations among the Islamic scholars.
Religious and statutory duty
Zakath is a religious duty imposed by the holy Quran upon Muslims, irrespective of their residency, while tax is a statutory duty imposed by the Parliament upon its residents and non-resident persons residing in its jurisdiction.
Accordingly, Zakath is a self-assessment payment; namely, every Muslim who has, at the end of the lunar year, net wealth exceeding the threshold pays (individually or collectively) Zakath on his own assessment and calculation.
The tax has a hybrid of self-assessment and an official assessment system. Generally, taxpayers pay their taxes on a self-assessment basis. In the event of failure by a taxpayer to pay the tax on a self-assessment basis, the default (official) assessment would be issued to such a person.
Hence, Zakath is paid by a Muslim (male and female) in accordance with his consciousness, and he is accountable only to his God who is omnipotent. So the room for the evasion and avoidance of payment of Zakath is minimal, unless his consciousness is corrupted. The tax is mostly paid by a person only for the law. As a result, a human being inherently looks for loopholes and ways for the evasion and avoidance of the due tax.
Preconditions for Zakath liability.
There are five (05) basic requirements one should have fulfilled so that he would become liable to pay Zakath on his wealth. These features are unique to Zakath and are not available in the tax system.
- Full ownership of the wealth,
- Attainment of the minimum value (threshold) of the wealth,
- The wealth should be an investment asset (potential to produce income),
- The wealth should be in excess of his essential needs and short term liabilities, and
- The wealth should be in his possession for not less than one year.
Each requirement needs a detailed explanation. For the want of space, it is very briefly explained.
Full Ownership of Wealth: A person has full ownership of wealth only if it has been acquired legally and ethically. If the wealth was obtained through unlawful (non-Halal) means—such as theft, fraud, bribery, or interest—it does not constitute rightful ownership. Consequently, such wealth is not subject to Zakath, nor can one purify or legitimize it by paying Zakath.
In contrast, when it comes to income tax, the source of income is generally irrelevant. Even if earnings come from illegal activities like smuggling or bribery, Inland Revenue Department will still assign a Taxpayer Identification Number (TIN) and impose the applicable tax.
Attainment of the minimum value (threshold) of the wealth: Generally, the minimum value of the wealth (Nisab) is calculated on the equivalent value of the pure gold of 84 grams, which is currently valued at around SLR 2.3 million. Once the threshold is reached, he is liable to pay Zakath on the entire value of the wealth, including the threshold, while income tax is paid on the income in excess of the threshold of currently LKR 1.2 million.
The wealth should be inherently able to generate income. This means that the wealth should have the potential to grow and generate income. Accordingly, a person who has cash in a business or in a savings is subject to Zakath as it has the natural potential to grow and earn income.
Any asset –be it domestic, personal or others- purchased with the predominant intention of investment or business, but used temporarily for domestic or personal use, falls under the category of Zakathable (subject to Zakath) assets.
However, domestic assets used for personal use such as a living house and jewelry or business or investment assets used for generating income such as property, plant, and equipment (PP&E) and building let, and shares for dividends (not for sales) are not subject to Zakath.
As for the income tax, the question of tax on asset does not arise, since income tax is charged on income not on asset.
The wealth should be in excess of his essential needs and debts. Zakath is not payable by a person on his wealth, even if its value exceeds the minimum threshold, provided his and his dependents’ basic needs, such as food, shelter, education, health, and a vehicle are not satisfactorily fulfilled. Hence, the wealth in excess after deduction of the expenditures incurred in acquisition of such basic needs and deduction of the short term liabilities taken is liable to pay Zakath on it.
As for the income tax, no such personal and domestic expenditures are allowed for the deduction, as the income tax is imposed on the excess of the threshold of LKR 1.2 million in the case of an individual.
The wealth should be in his possession for not less than one year. Liability to pay Zakath commences after the completion of one lunar year from the day the value of the wealth reaches its threshold (Nisab).
Accordingly, any Muslim who possesses wealth and has fulfilled the said five (05) preconditions is required to pay Zakath each year on a self-assessment basis, at a rate of 2.5%.
However, the tax is paid on the income earned during a year, whether it was with him throughout the year or not, at a relatively higher rate.
Long term and Short term Liabilities: Zakath and Tax.
In ancient times, there was no distinction between short-term and long-term liabilities, as such terminologies emerged only after the Industrial Revolution. Almost all liabilities were short-term, and similarly, debts were also of short duration. As a result, all debts were considered current assets.
Accordingly, early Islamic scholars, based on the principle of “Full Ownership of Wealth,” asserted that net wealth should be calculated by deducting liabilities and adding debts. Thus, a few contemporary Islamic scholars also held the view that all liabilities should be deducted and all debts added back—without distinction—when calculating net wealth.
However, some more contemporary scholars correctly argue that only liabilities and debts due within one year should be deducted or added back when calculating net wealth, while long-term liabilities and debts—those payable after one year—should not be factored into these adjustments. Instead, the person responsible for a long-term liability must pay Zakāt on it, and the person obligated to repay a long-term debt must also account for Zakāt accordingly.
Regarding income tax, the law states that any long-term liability that remains unsettled for more than three years is considered income of the person concerned and is taxed under the principle of “deemed inaccuracy.”
Zakath Rate is lower and Income Tax Rate is higher.
Generally, Zakath and tax are paid annually. Zakath is payable each year repeatedly on the wealth one possesses, irrespective of the fact that it was subjected to Zakath during the previous years. As for the tax, it is paid on the income once and for all. It becomes white, and it does not attract the tax again.
Since Zakath is paid annually on the same wealth that was subjected to Zakath in previous years, it is taxed at a rate of 2.5%, and the threshold is also calculated after deducting all the essential expenditures for the basic needs of the entire household.
Since the tax is charged on the income once and for all, the tax rate is relatively higher than the Zakath rate. It is to be underlined here that even though the income is subjected to tax once and for all, any additional income derived from the investment of that income will become liable to tax.
Threshold (Nisab) for Zakath and Income Tax
As stated earlier, the threshold for liability of Zakath on the net wealth is calculated on the basis of the value of 84 grams of pure (24 karat) gold, which is estimated at LKR Two (02) million. A Muslim possessing wealth in excess of the threshold, after having fulfilled all the preconditions for the liability of Zakath, is required to pay Zakath for such wealth.
Similarly, an entity (partnership or company) is required to pay Zakath, just as an individual calculates and pays Zakath. Any Zakath paid by such an entity is claimable by the partner or the shareholder either as credit against his total Zakath liability or as the exemption or exclusion of the wealth attributable to such Zakath from the calculation of total net wealth.
As for the income tax, thresholds of LKR 1.2 million and LKR 01 million are allowed, respectively, for individuals and partnerships. There is no such threshold for any other person or entity. Any amount of net income derived by such an entity is subject to tax.
Disbursement of Zakath and taxes.
It is evident that during the last several decades, trillions of trillions of taxes were collected, and the country was in a gradual recession and decline. It is widely alleged that hardly earned tax money was not properly disbursed and spent; in contrast, it was misused and wasted. The inevitable result is the bankruptcy of the country that we are witnessing today.
As for Zakath, much more focused attention is paid to the disbursement of Zakath than to its collection, as the earlier one is more susceptible to corruption than the latter one. Specific divine guidelines have been there from the very inception as to whom and for what the disbursement of Zakath should be made. Hence, no one has the authority to deviate from those principal guidelines.
Even though the Constitution has laid down checks and balances through Articles 148 and 149 to streamline the tax system, corruption and malpractice have crept in, and regrettably, they have eroded the confidence of the public.
It is really amazing to note that the Zakath system, which came into effect 14 centuries ago, is still compatible with the modern tax system. Zakath and income tax serve distinct yet parallel roles in financial regulation and social welfare. While both are direct levies on wealth or income, their fundamental purposes, methods of collection, and utilization differ significantly.
Zakath is a divine obligation aimed at wealth redistribution and social justice, fostering a sense of moral and spiritual responsibility among Muslims. In contrast, taxation is a state-imposed duty designed to finance public expenditure and sustain governmental functions.
One of the key distinctions lies in accountability—Zakath is self-assessed, with adherence based on personal faith and ethical commitment, whereas taxation is enforced through legal frameworks with penalties for evasion. Furthermore, the distribution of Zakath is divinely mandated, ensuring that it reaches designated beneficiaries, whereas tax revenues are subject to state control, which often raises concerns about inefficiencies and mismanagement.
(Writer is a Retired Deputy Commissioner General of Inland Revenue Department and can be reached on mifly1234@gmail.com)
