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Revitalizing dormant Zakat system

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CURRENT Zakat Administration run by the government is not leveraging the full potential of the system of Zakat. Various estimates suggest that people in Pakistan pay Zakat and other charities amounting to Rs 600 billion to Rs 800 billion annually. On the other hand, just over Rs 10 billion is collected by the government in the form of Zakat. Due to issues of trust deficit, people prefer to pay Zakat privately. The potential of Zakat collectible in Pakistan is estimated to be nearly Rs 3 trillion in a report published by the Institute of Policy Studies Islamabad in March 2023.

Nonetheless, the current legal framework allows the provision of private Zakat disbursement on a simple filing of an affidavit. Currently, the Zakat administration is only involved in screening and disbursement. Collection is almost totally dependent on Zakat deducted at source by financial institutions, such as banks, brokerage houses and mutual funds etc.

Since the Nisab amount is pre-announced and date of deduction is 1st Ramadan, any deduction of Zakat is accidental from people who forget to submit affidavit to avail exemption. The challenges in administration can be summarized from the perspective of three major stakeholders in the Zakat administration, namely the Muzakki (Zakat Payer), Mustahiq (Zakat Beneficiary) and the Aamileen (Government Zakat Department). From the perspective of Muzakki, one of the important challenges is trust deficit with regard to proper disbursement of funds to the needy as well as deserving people who are eligible to receive Zakat as per Islamic jurisprudence.

Another issue is inexact incidence in deduction at source. The amount is deducted on outstanding balance in remunerative bank accounts and investment without clubbing other Zakatable items and also without allowing adjustment of debts. Majority of people do not file income tax returns in Pakistan. Hence, they fear that if they disclose, report and pay Zakat to and through the government department, they may have to pay tax as well on otherwise unreported wealth. Hence, with this fear, they try to avoid and evade taxes while pay Zakat privately to fulfil religious responsibility.

From the perspective of Mustahiq, one of the important challenges is lack of impactful donation which hinders socioeconomic mobility. If people are paid very small and insignificant amounts, then they can at best afford consumption for a short period of time rather than using the funds more productively. Currently, in Guzara allowance across provinces, a paltry sum of Rs 1,000 to Rs 2,000 is paid monthly to each family. From the perspective of government as collecting agent and regulator, one of the important challenges is lack of capacity to engage in collection and assessment. Furthermore, bridging juristic differences among various schools and sects is also a major impediment due to which the Zakat administration had slowly moved to the private sphere.

In order to revitalize Zakat system, government needs to improve its reporting using multiple mediums to bridge the trust deficit. Periodic reporting about programs and allocation schemes together with independent auditing is necessary to build trust in the system. At district level, it is important to engage community and religious leaders to enhance public confidence. Tax incentives need to allow not only adjustment of Zakat in assessed income, but also in tax liability if the Zakat is paid to the government. This has been successfully implemented in Malaysia with success. Right now, income tax laws allow deducting Zakat as an expense to reduce taxable income rather than adjusting the tax liability itself.

Lack of awareness about Zakat rules is also an important barrier. A great majority of people are not aware of treatment of real estate, financial assets, receivables and debts. It is important to raise awareness and urgency about Zakat. It is a religious obligation and its effective mobilization and disbursement can improve social welfare of masses. Hence, it is critical to raise awareness using public broadcast media, awareness seminars, mosque sermons and other ways of engagement. A hotline and availability of scholar at district office can help the community in Zakat assessment as well.

In social crowd funding, technology is an important enabler in capitalizing on seasonal and impulsive charitable giving in important events. Not only ATMs can be used to disburse payments to deserving beneficiaries, but they shall be utilized for mobilizing charitable giving. Likewise, banks which provide discounts and reward points shall engage with institutions providing welfare services to offer redeeming of points for provision of social services. There is overlap in several government-run programs. Even if institutions or related programs are not sub-merged, there shall be greater collaboration with regards to sharing databases to avoid duplication of costs and adverse selection and to make it more difficult for people to benefit from multiple programs at once. It will also help in reducing the defaults or abuse since if a person is adjudged sharing false records in one program, he/she will be barred from multiple programs through centralized sharing of data.

Finally, private sector can mitigate trust deficit and bring operational efficiencies and competencies. Akhuwat is a bright example of how private sector organizations can provide social finance intermediation at a grand scale. Malaysia has successfully integrated private welfare organizations as registered Zakat collecting agents whereby they receive a significant portion of Zakat collected for disbursement on their own. The incentive for people is that they can only avail tax credit if they pay directly to the government or the government-certified Zakat collecting agents in the private sector. This can help leveraging the efficiency and trust private organizations have without engaging with them as competitors.

—The author is Head of Postgraduate Studies at SZABIST University, Karachi, Pakistan.

Email: [email protected]

 

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