Taxation is a very crucial element in Islamic finance as the uplift of the Ummah sometimes depends on this singular factor. Theoretically, the state in a Muslim country is supposed to cater to the needs and requirements of the muslim Ummah by virtue of the revenues from its various business propositions in its area of governance. There are various categories when it comes to benefiting the Muslim Ummah, each demanding due financial consideration for running its affairs. These categories include defence of muslim lands by virtue of maintaining a strong Muslim army; catering to the requirements of the needy and the poor; catering to the monthly compensation of hundreds and thousands of individuals employed by the state for the sole purpose of benefiting the Ummah; professionals such as Teachers, Jurists, State lawyers, Soldiers, Police personnel, doctors, so on and so forth. Hence, the state has to take the burden of all of them on its treasury, better known as Bait-ul-maal so that it can cater to all requirements of the Ummah efficiently and effectively. The expenditure of this accumulated taxation on the education of muslim men, women and children is a major element apart from catering to necessities such as food, water and clothing. This is the second most crucial sink of such taxation because in Islam, acquiring knowledge is obligatory upon every Muslim man and woman whereby the Prophet Muhammad (SAW) is reported to have said “Acquire knowledge from the womb of your mother to the lap of your grave!”Such forceful is the emphasis laid down on acquiring knowledge, therefore, all means necessary should be utilised to achieve this singularly important goal as laid down by the Prophet Muhammad (SAW).Therefore, taxation is Islam is a very healthy concept that is aimed at making the less prosperous elements of the Ummah more prosperous so that they can live a comfortable life by virtue of being able to cater to their basic needs easily, without going to a lot of pains to achieve the same.
Islam allows muslim governments to charge Jizya, a form of tax from non muslims living in a muslim country so that the state is in a position to cover the costs of the non-Muslims living in its lands without any additional burden on its own resources.
However, what happens if the state is unable to cater to all the financial requirements of the Muslim Ummah? Should it shed its responsibility of achieving these goals by claiming that a lack of funds does not allow it to fulfil its responsibility, or is there a way out of this crisis? There is certainly a way out and that way is to tax the well off individuals, investors and industrialists in the Muslim Ummah so that any deficiency on the part of the state to cater to the requirements of the Ummah can be replenished and the affairs of the Ummah can go ahead unhindered. Also, Islam allows muslim governments to charge Jizya, a form of tax from non muslims living in a muslim country so that the state is in a position to cover the costs of the non-Muslims living in its lands without any additional burden on its own resources. Islam always envisions a welfare state and for the same, it lays emphasis on equal distribution of resources amongst all the members of the muslim Ummah to avoid conflicts of any sort whatsoever. Islam encourages every muslim to be helpful towards each other and help each other in times of need thorough each other’s finances as well as through non-financial assets and resources. According to the Islamic Shari`ah, an Islamic state cannot impose any taxes upon its muslim citizens, besides Zaka’h. As far as the non-Muslims living in an Islamic state are concerned, they become citizens of an Islamic state through an agreement between themselves and the Islamic state. Taxes upon these non-Muslims shall be governed by the agreement that was mutually agreed upon between them and the Islamic state. The taxes proposed on the non-Muslim citizens in the agreement may or may not be equal to or related with the rates specified for Zaka’h. In view of the above explanation, imposition of Income tax, Wealth tax and all other direct or indirect taxes, by an Islamic state upon its muslim citizens, is not in accordance with the directives of the Islamic Shari`ah.