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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