CHAPTER # 7FISCAL POLICY OF
ISLAMIC STATE
Prepared By
Kokab Manzoor
Chapter`s OutlinesMeaning of Fiscal PolicyFiscal Policy of Islamic StateZakat as an Instruments of Fiscal PolicyImpact of Zakat on EconomyBait-Ul-Mal, its definition and sourcesTheory of taxation and principle of taxationNature of Public Expenditures in Islamic State
Meaning of Fiscal Policy
All actions and administrative measures of the government which are related to revenue and expenditure are called Fiscal policy.
Instruments of Fiscal Policy
Government expenditureDirect & Indirect TaxesDeficit FinancingSubsidiesTransfer Payments
Islamic State & its Fiscal Policy
Objectives of the fiscal policy of the Islamic state
1 Eradication of Unemployment2 Equitable Distribution of Wealth3 Economic Stability4 Faster Economic Progress5 Full Employment6 Efficient Allocation of Resources
Zakat as an instrument of Fiscal Policy
The most important element of Islamic fiscal policy is Zakat.
Zakat must be expended in the same area from which is collected. If however the surplus remains after supplying the wants of the deserving people of the area, it can be transferred for expenditure in other area
Role of Zakat as an instrument of Fiscal Policy
Equitable distribution of wealth
Achieving full employment without inflation
Effects of Zakat on the allocation of resources
Zakat and Economic Stability
Impacts of Zakat on Economy
Impact of Zakat on Consumption
Impact of Zakat on Investment
Impact of Zakat on Saving
Impact of Zakat on Economic Development
The institution of Bait-UL-Mal
Definition Literally “bait ul Mal” means “ the house of
wealth” In technical terms, “ it is the establishment
of public exchequer is necessary to enforce the economic system of Islam”
The rules of receipts and disbursement of bait-ul-Mal have been formulated in Islamic system of government
Sources of Revenue of BaitulMal
1 Zakat 2 Ushar3 Jazia 4 Kharaj5 Sadaqat 6 Faie7 Khumas 8 Dariab9 Rent (KAR-AL-ARD)10 Ashoor (Import Duty)
11 Waqf (Trust) 12 Other Source
Is taxation allowed..??Yes , BUT All taxes other than Zakat are imposed as
an exception NOT rule Islamic state is authorized to impose taxes
in addition to Zakat as a supplementary or complementary policy because,
Achievement of Sustenance Welfare is a duty of Islamic state and Greater Welfare is desired.
Theory of TaxationIn the traditions the word “Makas” has been used to denote “Tax”.The tax collector was called “Al-Makas”
First time, in the reign of Hazrat Umar (R.A) the duty was imposed on Muslims and merchants of Non Muslim countries.If anyone had paid Zakat he could seek exemption by submitting an affidavit.
Principles of Tax Policy in Islam
1 To be imposed under dire necessity2 Should coincide with the period of need3 Fulfill the objectives of the Islamic
Government4 Ability to pay5 The Principle of Equity6 The Principle of certainty7 The Principle of convenience8 The Principle of Economy
Nature of Public Expenditure in Islamic
State
There are two kinds of public expenditure in Islamic Economy
1Permanent Heads of Expenditure
2Expenditure necessary under present circumstance
1 Permanent Heads of Expenditure
DefenseLaw and orderJusticeProvision of basic necessitiesPropagation of IslamPromotion of Good and prevention of evilCivil administrationFor social services
2 Expenditure Necessary Under Present Circumstance
Environmental safeguard Necessary goods Scientific research Capital formation and economic progress Subsidies for important private activities Cost of achieving economic stability Expenditures required to organize
additional activities assigned to state by the people.
Principles of Public Expenditure
Achievement of objectives of Fiscal PolicyThe Principle of public welfareThe Principle of JusticeThe Principle of simplicityTo safeguard the rights of future generationThe Principle of inter regional developmentThe principle of avoiding delayThe principle of fulfilling the needs of the people
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