A Preliminary Study on Norms and Motivations towards Zakat and Income Tax Payment by Muslim Tax Payer

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1 International Academic Institute for Science and Technology International Academic Journal of Accounting and Financial Management Vol. 5, No. 3, 2018, pp ISSN International Academic Journal of Accounting and Financial Management A Preliminary Study on Norms and Motivations towards Zakat and Income Tax Payment by Muslim Tax Payer Puteri Nur Liana Graduate School of Business, Science University of Malaysia (USM), Penang, Malaysia.. Abstract Zakat and income tax payment are equally important to the development of country and social-economic of community. Muslim taxpayer in Malaysia are given the privilege to claim tax rebates on their zakat payment to the Islamic institutions (State Islamic Religious Affairs Department). This has given all Muslim taxpayer the advantage to choose either to pay more income tax or less. The contribution to zakat is only compulsory at 2.5% of wealth but most of the Muslim taxpayer would prefer to pay more due to personal reasons. Although it is a good practice that can encourage Muslim to perform the third pillar of Islam, the freedom given to Muslim taxpayer are causing less tax revenue to the country. This study will investigate the distribution pattern of individual income tax and zakat contribution among Muslim taxpayer and examine the norm that motivate their tax and zakat payment behaviour. From this study, most Muslim taxpayer prefer to pay more zakat compared to the amount which they required to pay by Islamic law. For Muslim taxpayer, the zakat rebate is an opportunity to avoid paying income tax or reduce income tax contribution. Tax payer s behaviour apparently depends on their level of trust to the governments and Islamic institutions. Besides trust, the social norms also influence the behaviour towards zakat and income tax payment by Muslim tax payer. Keywords: Zakat Payment, Income Tax Payment, Tax Rebate, Zakat Compliance, Tax Compliance Behaviour, Trust, Norm. Acknowledgements: I wish to thank my colleagues who greatly assisted me with their feedbacks for this research. A special thanks to Dr. Yuvaraj Ganesan for his advice and opinions. 118

2 1. Introduction Zakat is a form of alms-giving treated in Islam as a religious obligation or tax which by Quranic ranking is next after prayer in importance (Wikipedia), also Zakat is payment made annually under Islamic law on certain kinds of property and used for charitable and religious purposes, one of the five pillars of Islam (oxforddictionaries.com). On the other hand, tax is the compulsory monetary contribution to the state s revenue, assessed and imposed by a government on the activities, enjoyment, expenditure, income, occupation, privilege, property, etc., of individual and organization ( In Malaysia the amount paid for zakat is deductible as rebate for taxpayer under section 6A (3) of the Income Tax Act (ITA) This rebate claim must be supported with official receipt by Islamic institution. Any amount paid directly to the needy without going thru the Islamic authority will not be eligible for deduction. The zakat payment must be made within the year where the rebate is claimed. If the zakat payment were made in a different year, the tax rebate cannot be claimed for the current year of assessment. The zakat is calculated and paid on wealth of a person after a full lunar/islamic year, compared to tax which is chargeable on income based on Gregorian calendar. Due to this differences, Muslim taxpayers need to be wise in planning the proper time for zakat payment to be eligible to claim the desired amount of rebate. The rebate for zakat is only limited to the tax payable amount. In Islam, the zakat rate is at 2.5% of wealth, only if it touches a Nisab threshold calculated on the value of wealth at the end of the Hawl (Islamic period based on lunar year). Nisab is the minimum amount of wealth a Muslim must possess before they become eligible to pay Zakat. Nisab requirement is necessary to make sure that only those who are wealthy shall pay zakat (zakatselangor.com.my). Tax payers can pay zakat without limit which is not limited to 2.5% of wealth. Meaning, if the amount of zakat is lower than taxable amount under ITA, taxpayer can increase their zakat payment to be entitled to claim full rebate for taxable amount. It is their choice to pay either the government or Islamic institution or both. In practice, the zakat rate on wealth is usually lower than income tax rate. The zakat rate is 2.5% of wealth compared to tax rate which varied depending on taxpayers standard of income (progressive rate). The higher the income, the higher the tax rate will be (refer Schedule 1 Section 6 of ITA 1967). Due to this differences, the tax amount normally will be higher than the amount of zakat imposed. As a Muslim, it is compulsory to pay zakat on 2.5% of personal wealth as agreed by National Fatwa but it is not mandatory under the Law in Malaysia, even though the zakat amount is only at 2.5%, Muslim can pay more if they want to. Even if they refuse to pay zakat, it is not an offence in Malaysia. If they prefer to pay more Zakat, it will certainly reduce the tax payable amount. Based on this study, it is an acceptable norm for Muslim tax payer to pay more zakat in order to avoid themselves from paying higher tax or not paying income tax at all. Some taxpayers believe that zakat will be used for better purpose such as helping the poor and needy besides contributing for Islamic development in the country. Zakat fund is used to help the needy under the category of Asnaf. There are eight groups of people who can receive zakat as stated in the Holy Quran which is the poor, needy, amil, mualaf, those in bondage, those in debt, those in good cause and those in the wayfarer. On the other hand, the tax money collected will channel to government/public fund which will be used in funding the development projects and infrastructures of the country. 119

3 2. Literature Review In the theory of social contract, taxpayer will willingly pay tax if they believe they will benefit from the tax money they re paying. If taxpayers felt that the tax money did not benefit the public, they will reluctantly pay tax and will try to avoid if they can. (Alm J,1992). Taxation in a social contract perspective is based on quality of government s performance to manage country s financial from tax revenue (Mangoting Y.,Sukoharsono E.G, Rosidi and Nurkholis (2015). This response is also similar in people s behaviour towards paying the zakat. As for zakat, besides attitude and perceived service quality, trust is an important factor that motivate zakat compliance behaviour (Noor and Saad, 2016). In a different study, fairness and trust towards the zakat collection bodies will effects the individual compliance to pay zakat. The three main factor that influence the level of trust towards the zakat institution is corporate image of the zakat institutions, zakat collection and zakat distribution (Hairunnizam and Sanep, 2014). There are five factors or drivers that influence tax compliance behaviour which is deterrence, norms, opportunity, fairness and trust and finally the economic factor. (OECD, 2010). The factors that influence tax compliance when it comes to zakat matters are mostly related to norms and fairness and trust. These are two most related factors that taxpayers agree will effects their behaviour towards income tax and zakat payment. In terms of norms, a person religiosity level effects their belief and his or her willingness to pay zakat or income taxes. They are positive relationship between religiosity and awareness to pay zakat and taxes. (Raihana MohdAli and Pope, 2014). A person religiosity level is however difficult to measure. In every practice of religion, intention is an important factor. Even in Islam, peoples work is judged according to their intention (Nawawi,2012), cited in Muhammad and Saad, Methodology Two surveys were conducted. The first survey is made via online thru Facebook (social media) asking in general about the preferences on paying the zakat at its rate or more in order to reduce income tax payment. The other survey is prepared thru questionnaires asking about the distribution of income tax and zakat among taxpayers, the questionnaire also examined the effects of trust to the government and Islamic institutions towards income tax and zakat payment. Finally, a scenario question is given to test the opinion on the current tax law and tax payer s preferences on paying the zakat or income tax payment at its rate or more. This questionnaire is distributed to a groups of 20 people which consist of 6 male respondent and 14 female respondent with taxable income who are eligible to pay both tax and zakat. The respondent selected are all public servant working for Inland Revenue Board of Malaysia. This type of respondent is selected to see the response from people with tax knowledge on how they merit the importance of income tax and zakat. From questionnaires feedback, most of the respondent recognize the importance of income tax. Although working in the public sector, majority agree that trust in the government effects their decision in paying income tax. 4. Results Based on the questionnaire feedback, only 18 respondents pay both income tax and zakat. 2 respondents admit to pay only the zakat. Majority of the respondents agree that their purpose to pay more zakat is motivated by the intention avoid paying high income tax and to get tax refund. Answering on how much zakat they have paid, 3 respondents pay zakat at 2.5%, 1 respondent pay zakat less than 2.5%,

4 respondents pay zakat more than 2.5% but still make contribution for income tax and 2 respondent pay more than 2.5% zakat with no contribution at all to income tax. This shows that people still aware on the importance of both zakat and income tax to help the poor and needy at the same time to provide for current and future developments of the country. However, the refusal to pay income tax from IRB officers who knew the importance of tax to the government is something unexpected. From this response, it is assumed that the Muslim taxpayer with less knowledge on income tax and not working in the public sector would have more preferences on paying the zakat and less awareness to pay income tax compared to the sample who should have more priority on income tax, or at least make a fair distribution to both. The survey also asked about the norm weather it is acceptable for Muslim taxpayer to pay more zakat to avoid paying taxes. 85% agree to this point while another 15% disagree that zakat is used as a tool to avoid paying more income tax. A scenario question is created; if the government change the law where the zakat rebate can only be claimed limited to 2.5% of wealth as per zakat calculation and any extra payment will be treated as donation to see the feedback. 25% agree to the idea. Another 75% disagree to it. The reason for this disagreement is however not studied. Maybe most would prefer more flexibility in their choices or perhaps it has to do with morale issues. From the online survey, six people replied. Majority prefer to pay both income tax and zakat at the various rate of distribution depending on their preferences either to pay more income tax or more zakat. They believe both is equally important. Thanks to the awareness campaign by the tax authority and government. This at least reduces Muslim rejection to pay income taxes. They are also respondent who are willing to increase their zakat payment to avoid paying tax or reduce income tax amount even though it has exceeded 2.5% zakat rate. Some prefer not to disclose their tax and zakat distributions because it is considered personal. The online survey only asked about the preferences to pay the zakat at its percentage or others. 5. Discussion 5.1. Monthly Tax and Zakat Deductions In terms of tax collection, under the ITA, employers must make monthly tax deductions on workers/taxpayers who exceeded a certain level of income to the Inland Revenue Board of Malaysia (IRBM). This monthly tax deduction is made according the Income Tax Schedule (Deduction from Remuneration) Rules. If a taxpayer chooses to make a monthly zakat deduction instead, the amount of monthly zakat payment can be set off with the monthly tax deduction. In other words, the monthly zakat deduction will automatically reduce monthly tax deductions. If the tax payable amount is lower that total monthly tax deduction, taxpayer will get a tax refund on the excess amount after they have submitted the tax return form for that particular year of assessment. However, if they pay only monthly zakat deduction and no monthly tax deduction were made, there will be no excess payment if the tax payable amount is lower than those deductions. No refund will be made by the IRBM. The tax knowledge on how zakat payment is treated is also effecting taxpayer s behaviour. Based on the cases audited by the IRBM, most taxpayers knew that zakat can be claim as rebate on the tax payable amount but not everybody knew that excess zakat payment is not treated similar as excess monthly tax deductions. If taxpayers make high deductions for zakat compared to the tax payable amount, the excess amount of zakat payment will not be refunded by IRBM. In Islam, any excess in zakat payment is treated like Sadaqah (gifts or donations). For the IRBM, any rebate claim for zakat payment without official receipt will be treated as false claim 121

5 and adjustment will be made on the differences in tax payable amount with penalty as stated in ITA From tax compliance point of view, this situation will reduce the compliance rate either it is made with intensions to avoid tax or due to lack of knowledge among taxpayers. 5.2 Zakat is Obligatory Contributions There are issues where other religious practitioners believe that their donation to their religious bodies should be treated like zakat. Under the current rulings, these payment is treated as donations and the deduction will only reduce the taxable income instead of rebate as zakat. Apparently, donation is made by people voluntarily and freely and it is not a sin for not making any donation to any person or institutions, however, for Muslim, any people who have a certain amount of wealth must pay zakat, and as an Islamic country, this is the main reason why zakat is treated the way it is treated in Malaysia. Some people agree that this rebate incentive is given to avoid double taxation on the same source of income. In Islam, zakat is chargeable on income received, on wealth (including saving, gold, cattle and etc.), and fitrah. According to the Income Tax Act, income tax is chargeable only on the incomes received for the year. Implementation of the provision of zakat as a deduction from tax payable amount only applied to zakat income in Aceh, Indonesia because it is associated with income tax that becomes the object. While zakat maal (wealth) and zakat fitrah (end of Ramadhan) are not related to income. (Fuadi, Thayeb, Suhaidi and Kamello T., 2015) In Malaysia, the tax rebate is given to all types of zakat payment made to the State Islamic Religious Affairs Department. Zakat is an obligatory contribution in Islam, however in practice, it is not an offence for not paying zakat under the law since the enforcement of Syaria law in Malaysia does not emphasis on the on zakat contribution. To encourage Muslim to pay zakat, the Islamic Institutions stresses more on education and awareness campaign instead of punishment. From the economic point of view, zakat will effect tax collection and distribution of wealth in the country. The zakat fund can only be used for eight groups of receiver also known as Asnaf by Muslim. The distribution of zakat is managed by the Islamic institution either directly or through application by the people who are qualified under the Asnaf groups. The zakat distribution through application is subjected to approval by the Islamic institutions committee. 6. Conclusion and implication As conclusion, both zakat and income tax or equally important. For welfare of people and development of the country. Zakat is distributed to the poor and needy among Muslim community whereby tax money will benefit both the poor and needy, and also the tax payers who enjoy from the facilities built by the government, service provided at reasonable and minimal cost, government grant for business development, scholarships, low interest loans, salary for public servant and many more. A balance distribution between zakat and income tax will help to maintain this cycle. From this study, it is clear that most Muslim taxpayer pay more zakat compared to the amount which they required to pay. If taxpayers prefer to pay only the zakat, this will affect the tax revenue and in return it will affect the funding of government projects, maintenance of government services and many more. Failure to pay zakat on the other hand will upset the welfare of the poor and needy plus the Islamic growth as a whole. Muslim tax payer s awareness on the importance of both zakat and income tax is crucial for development of the country and religion, and most importantly people. 122

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