Apply zakat policy of rebate to all citizens

(Malaysiakini) The current tax policy is unfair as proceeds from zakat, an Islamic tax, is used exclusively for the development of Muslims through the building of mosques and other amenities, said senator S Ramakrishnan.

The senator, who is also an accounting lecturer, called on the government to be fair to all Malaysians by giving non-Muslims a similar tax rebate like zakat.

Ramakrishnan urged the government to amend the tax legislation so that Malaysians of all religions are treated fairly in the spirit of '1Malaysia' when computing their income tax.

According to Ramakrishnan, donations to a temple or church by non-Muslims are calculated differently for tax purposes by the Inland Revenue Board.

Ramakrishnan, who has been teaching accounting for the past 20 years, said Muslims get a discount from paying income tax because they also contribute to zakat.

A Muslim gets a rebate from paying zakat, whereas the non-Muslim gets only a relief when donating money to religious organisations.

The Inland Revenue Board (IRB) told Malaysiakini that a rebate can be deducted from the zakat as the contribution under Islam is considered a tax.

In the case of a non-Muslim who has donated to an approved church or temple, he will get a deduction along with other reliefs (such as personal, wife and children relief) but ended up paying relatively higher income tax because his religious contribution would not be treated as a rebate.

Zakat compulsory for Muslims

IRB chief executive officer Dr Mohd Shukor Mahfar stressed the Income Tax Act 1967 did not discriminate against race or religion and the comparison of the tax payable by a Muslim against a non-Muslim is misleading.

He cited the Income Tax Act 1967, Section: 6A(3) wherein it states “a rebate shall be granted for any zakat, fitrah or any other Islamic religious dues, payment of which is obligatory.”

“A Muslim has to make two compulsory payments levied on the same source of income every year, namely income tax and zakat.

"Therefore, this rebate was given to relieve a Muslim from the burden of 'double taxation' on the same income. Please note that the zakat must be administered by official authorities under the purview of state governments.

“Donations, on the other hand, are voluntary in nature and made to privately-run non-profit institutions. These institutions, which may also include Islamic religious organisations, can apply for tax exemption status so that donations are tax deductible.

“As for the non-Muslims, they have the choice to make donation to approved organisations/institutions and claim for relief up to 10 percent of their aggregate income.

“Zakat allowed as rebate is limited to the amount of tax to be paid by the individual. Therefore, if the zakat is more than the tax to be paid, the excess amount could not be claimed as refund or be carried forward.”

Shukor (right) proposed that any amendment to the law as suggested by Ramakrishnan should be forwarded to Finance Ministry so that it could be approved by the cabinet and discussed in Parliament before it could be implemented by IRB.

Ramakrishnan said that non-Muslims earning a similar annual income compared to Muslim would end up paying higher taxes.

“It is estimated that 90 percent of the people paying income taxes in Malaysia are non-Muslims. Whilst those who contribute to zakat (tax deductible from the net tax), the tax is given solely to state religious bodies.”

The senator added: “When a non-Muslim do their religious obligations (donations or tithes), it is not tax deductible unless the church or temple has applied and obtained the approval for tax exemption.

“It is a very tedious task for non-Muslim religious organisations to get any approval for tax exemption and it is very stringent and often not approved by the government.”

Ramakrishnan called on the government and Prime Minister Najib Razak to amend the laws and raise it in Parliament so that the freedom of religious practice as enshrined in the constitution be made consistent with tax legislation.

Questions posed to IRB

Why when a donation is made to a church or temple, they do not get tax exemption whilst a contribution to zakat is allowed?

Mohd Shukor Mahfar: For the Muslim, paying zakat (tithe) is one of the five pillars of Islam and it is a must, not an option for those who meet the requirement, at 2.5 percent of net income received. Zakat is a tax for Muslims, not a donation, and therefore it is treated as rebate to avoid the same income to be taxed twice.

Zakat allowed as rebate must be paid to religious authority under any written law, which is Lembaga Zakat. But zakat paid to individual or charitable organisation would not be allowed as rebate.

As for other religions, their followers could still claim for deduction for the amount that they have donated as long as their place of worship is approved under Section 44(6) Income Tax Act 1967. Donation, as oppose to zakat, is not compulsory.

To get the approval, application must be sent to our Tax Policy Department, Jalan Duta. For further information and guidelines, please refer to this page.

Why is it difficult for temples or churches to get tax exemption?

The guidelines given are prepared for all organisations or institutions regardless of faith/ religion. Approval is given if the organisation/institution fulfilled the criteria in the guidelines and when all requirements are fulfilled including submitting proper paperwork and complete supporting documents. Some applications might take longer to be approved should the paper work or supporting documents submitted were incomplete.

Up to this date, there are 1,300 organisations/institution/funds have been approved under Section 44(6). The list of organisations/ institutions/funds could be viewed here.