While many economists and politicians have begun to talk seriously about using wealth taxes to raise government revenue and curb rising inequality, one in every four people globally are already subject to a similar taxation model called Zakat. In the form of Zakat, Muslims around the world who possess wealth over a particular threshold are obliged to donate 2.5% of one year’s cumulative wealth to the poor and disadvantaged. The size of the Zakat pool is significant – estimated to be between $200 billion to $1 trillion each year.
How does the Zakat work?
The Zakat is not a simple charitable contribution; it is a rules-based system of obligatory (sometimes religious, sometimes actually legal) charity. Like a wealth tax, one of the objectives of Zakat is to redistribute wealth. However unlike a tax, there are specific categories of eligible Zakat recipients (poor, needy, debt-ridden) mandated by Islamic law.
Historically, since the time of the Prophet Muhammad, Zakat was managed by the state. However, in religious doctrine there is no clear indication whether Zakat collection and distribution should be centralised, decentralised, institutionalised or individually managed.
As a quasi-voluntary contribution, Zakat management practices vary across the world. In some countries (Saudi Arabia, Pakistan, Sudan) it is obliged by state law, while in many others (including Indonesia, Iran, Kuwait, and Bangladesh) the state administers voluntary Zakat funds. Many Muslims also contribute Zakat to non-governmental organisations, or donate directly to the needy in their own communities. With increasing contestation between state and non-state actors for Zakat administration, it is important to explore the issues at play. I do so below with the case of Bangladesh.
The Zakat in Bangladesh
In Bangladesh, where over 90% of the population is Muslim, there is both government and private administration of Zakat. The government’s Zakat fund is operated by a board under the Islamic Foundation, and organisations like the Centre for Zakat Management, Anjuman Mofidul Islam, and the Quantum Foundation are also engaged in the collection and distribution of Zakat. Non-governmental organisations distribute Zakat by organising programmes such as livelihood and human development programmes, scholarships for underprivileged children, and emergency humanitarian assistance.
Despite these funds and programmes, individual distribution of Zakat is the most prevalent practice in Bangladesh. This mainly involves people distributing clothes, contributing to mosque funds, and providing direct cash transfers within their local communities.
There are several issues that constrain the potential of the Zakat to curb inequality and reduce poverty:
Lack of traceability and trust
The government Zakat Board, which is responsible for Zakat management across the country, lacks transparency in both the collection and utilisation of funds. Since it is not possible to trace how and where the funds are spent, Zakat payers have little trust in the state’s ability to distribute it to eligible recipients. In Bangladesh, many people prefer to direct their contributions to religious leaders, who are very influential and more trusted than government bureaucrats, while others feel more comfortable giving directly so they can interact with the receiver.
There is very little communication among all the players managing Zakat funds in Bangladesh. With government actors, private voluntary organisations and individuals handling Zakat, the lack of professionalism involved, and the absence of effective networks or systems to coordinate, the process is not as efficient or fair as it could be. In some communities, people receive Zakat from different sources at multiple times, while people living in hard-to-reach areas are often neglected.
Inconsistent tax treatment
Similar to the practice in many Western countries of allowing a tax deduction for donations made by individuals or companies to registered charities, in Bangladesh, section 44(2) of the 1984 Income Tax Ordinance allows a tax exemption or deduction on any sum paid to the Zakat Fund or as a donation to a charitable fund established under the Zakat Fund Ordinance.
There are complexities in implementing these tax deductions, as it requires coordination between state agencies and locally-managed Zakat administrators. Further, since the tax deduction is only applicable for contributions made to government-enlisted funds, the many people who chose to distribute Zakat in other ways may then face a greater burden by paying both the full tax amount as well as the 2.5% Zakat.
The role of the government
Due to the challenges described above, the Zakat is not as impactful as it could be in Bangladesh. In order to make Zakat collection and distribution more effective, and achieve its potential for reducing poverty and inequality, the role of the government is crucial. However, some key questions on this issue remain:
- How can the state take up a more effective role in administering Zakat?
- Should the focus be on setting up strategic partnerships with different actors managing it for the most efficient distribution while the government sits as the central coordinator?
- Or should the government aim to be the most reliable, as the preferred actor in Zakat management, eliminating the need for other actors?