Taxing Takāful Products under the Goods and Services Tax (GST) Act 2014 and Sales and Service Tax (SST) Act 2018 in Malaysia: A Sharīʿah Appraisal
Dr. Mahadi Ahmad, Burhanuddin Lukman, Saba’ Radwan Jamal Elatrash
International Shari’ah Research Academy for Islamic Finance (ISRA)
Mr. Ahmad Fadhil Hamdi Mohd Ali
Great Eastern Takaful Berhad
This research examines the Sharīʿah view on the Goods and Services Tax (GST) and Sales and Services Tax (SST) as a sales tax on general takāful (Islamic insurance) products. This becomes a concern because takāful is a gratuitous contract among the participants, even though the relationship between participants and the operator is a commercial one. The concern is seen as valid because the takāful operational framework is different from its insurance counterpart. The GST and SST laws provide a tax exemption for a gift that does not give benefit to the person making it. The question arises whether takāful, being a gratuitous contract among the participants, can enjoy such exemption. Beyond the specific issue of takāful, a key concern here, which is central to the main research objectives, is the Islamic position on taxation in general and sales tax in particular. These larger issues must be considered when seeking the Sharīʿah ruling on imposing tax on takāful.
There is a lot of previous research on taxation in general while there is a dearth of specific research on sales tax on takāful. The researchers have relied on a qualitative method of inquiry to investigate Islamic primary and secondary sources and the relevant Malaysian laws, to all of which they apply content analysis. The researchers also found it necessary to study the fiscal policies of the Prophet (P.B.U.H.). They found that modern taxation did not exist in the lifetime of the Prophet (P.B.U.H.) or during the caliphate of Abū Bakr. During the caliphate of ʿUmar, kharāj (Islamic tax on agriculture), ʿushr (alms on agricultural yields) and jizyah (tax paid by certain non-Muslims to rulers in Muslim states), which are all forms of taxation, were levied. It should be noted that they were direct rather than indirect taxes.
The authors had to investigate the nature of GST and SST and the Islamic history of taxation. They deduced the method of Islam in imposing levies other than zakāh (obligatory alms) and studied both sales tax and takāful from the angle of maṣlaḥah
(public benefit) to know whether one of them should be dropped for the other in case of conflict. The authors found that Muslim jurists permitted taxation with conditions. When any of these is not fulfilled, that tax will be an invalid source of public revenue. The conditions are:
(1) There must be an actual budget deficit and lack of alternative sources of funding it. The reasoning for this condition is to prevent financial burdens being unnecessarily placed on citizens.
(2) The tax should be levied in a just and equitable manner. There should be no favoritism to exclude some eligible taxpayers while imposing the tax on others.
(3) The expenditures of the tax proceeds must be for the public interest.
(4) The decision to impose the tax must be approved by the shūrā (consultative) committee. This may now be represented by the parliament that represents the electorate.
These are general conditions that apply to all taxes irrespective of whether they are on income or sales.
Some of the other major findings of the research are as follows:
(1) The study found that GST and SST are consumption taxes that are indirect. These are not modelled on the Islamic method of imposing levies beside zakāh, as the research established that the Islamic method of levying is based on income, not on expenditures.
(2) Without prejudice to any condition for Islam to allow taxation, the study shows that taxation, whether income tax or sales tax, falls under maṣlahah ʿāmmah (public interest). The general Sharīʿah principle is that individual harm is to be borne in favour of public interest.
(3) Because a consumption tax increases the price of goods and services and applies to everyone, including the poor and destitute, the decision to impose it must be subject to exhaustion of the funds collected from income tax.
(4) The general rule for taxes in Islam is that they can only be imposed on the same category of people who can pay zakāh on wealth. Sales tax violates this rule.
(5) In the eyes of Sharīʿah, anyone who meets the conditions of paying zakāh is a rich person. This is the line of demarcation between those obliged to pay income tax and sales tax— when it is resorted to by virtue of ḍarūrah (necessity). Those below the threshold of paying zakāh should be left to their own discretion whether or not to pay sales tax.
(6) The research found that capability is what is considered in Sharīʿah to make someone subject to a levy beside zakāh. Whether or not he or she has paid zakāh is not a relevant criterion because of the ijmāʿ that will be mentioned below which legalized the imposition of a levy if the zakāh funds are exhausted.
(7) It was also found that takāful revolves between ḍarūriyyāt (essentials) and ḥājiyyāt (complementaries). Thus, any attempt to subject its products to a sales tax like GST or SST must consider this aspect in order not to counter the objectives of the Sharīʿah. That could happen if a price hike has a significant negative impact on the number of people able to subscribe to a takāful plan.
(8) The exemption given to medical insurance by the current Malaysian SST should be extended to other takāful products that are necessary for the participants because the sales tax will cause a price hike on those items.
(9) Without prejudice to any condition mentioned above for allowing any form of tax, the Malaysian government may at times have a strong justification to impose a fair and just tax because the federal government is constitutionally restricted from interference in zakāh collection and distribution in Malaysia.
The research recommends the following policies:
(1) Sales tax should not be resorted to except by necessity that could not be solved by income tax.
(2) People below the threshold of zakāh payment should be exempted from sales taxes like GST and SST. This can happen through reimbursement of whatever sales tax they have incurred.
(3) Takāful should not be subject to tax because its classical models, ʿāqilah and nihd, were all meant for social assistance that helps the government as well.
(4) The authors also wish that if the government is at any time compelled by adverse economic circumstances to impose a sale tax on general takāful, it should be limited to the wakālah fee only.
The study recommends further research on GST as 165 countries have implemented it; hence, research is needed on how to make a sales tax compatible with the Sharīʿah requirements on levy imposition. This would allow Muslims to take advantage of it where necessary while avoiding its disadvantages.
GST, SST, consumption tax, takāful, levy
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