The goods and services tax (GST) on takāful products: a critical Sharīʿah appraisal

Burhanuddin Lukman; Saba’ Radwan Jamal Elatrash Article The goods and services tax (GST) on takāful products: a critical Sharīʿah appraisal ISRA International Journal of Islamic Finance Provided in Cooperation with: International Shari'ah Research Academy for Islamic Finance (ISRA), Kuala Lumpur Suggested Citation: Burhanuddin Lukman; Saba’ Radwan Jamal Elatrash (2017) : The goods and services tax (GST) on takāful products: a critical Sharīʿah appraisal, ISRA International Journal of Islamic Finance, ISSN 2289-4365, Emerald, Bingley, Vol. 9, Iss. 2, pp. 205-209, https://doi.org/10.1108/IJIF-08-2017-0027 This Version is available at: https://hdl.handle.net/10419/236913 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ The goods and services tax (GST) on takāful products: a critical Sharīʿah appraisal Burhanuddin Lukman and Saba’Radwan Jamal Elatrash Research Affairs Department, International Shari’ah Research Academy for Islamic Finance, Kuala Lumpur, Malaysia Abstract Purpose –This paper aims to ascertain the Sharīʿah (Islamic law) stance on the imposition of goods and services tax (GST) on tabarruʿ-based takāful (donation-based Islamic insurance) products in Malaysia. The paper aims to do so by analysing the philosophy, purposes and structure of GST on takāful products and comparing the imposition of GST on tabarruʿ-based takāful with its imposition on conventional insurance while probing into the Sharīʿah texts and opinions of classical and contemporary scholars about taxation in Islam. Design/methodology/approach –The paper uses a qualitative research methodology. In addition to the literature and text on websites, the information on how GST is applied in practice is also obtained through interviews, discussions and documents from takāful operators. To determine the Sharīʿah position on GST, reference has been made to classical and contemporary Sharīʿah literature, including local and international Sharīʿah advisory bodies’resolutions and standards. Findings –This study finds that a strict interpretation of Sharīʿah does not allow for the imposition of GST; however, there is still room for the government to justify it using a broader interpretation of ma sla  hah (public interest). Takāful has become a need for the society and is subscribed to by all income groups, and not only by the rich. Hence, the government should consider exempting takāful products from GST. The basis of tabarruʿin takāful does not provide conclusive Sharīʿah evidence for takāful to be exempted from GST. Originality/value –This research paves the way for the industry to propose further measures on GST for takāful products such as the exemption of GST on the tabarruʿamount or imposition of a zero rate of GST on the relevant takāful fees and charges that are currently burdensome to consumers. Keywords GST, tabarruʿ,takāful, Sharīʿah, insurance Paper type Research paper Introduction The Goods and Services Tax Act of 2014 (GST Act), which has been effective since 1 April 2015, led to the imposition of a tax on takāful (Islamic insurance) products in Malaysia. In line with the tax neutrality approach, takāful is treated equally to © Burhanuddin Lukman and Saba’Radwan Jamal Elatrash. Published in the ISRA International Journal of Islamic Finance. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode Goods and services tax on takāful products 205 Received 31 August 2017 Revised 12 September 2017 Accepted 12 September 2017 ISRA International Journal of Islamic Finance Vol. 9 No. 2, 2017 pp. 205-209 Emerald Publishing Limited 0128-1976 DOI 10.1108/IJIF-08-2017-0027 The current issue and full text archive of this journal is available on Emerald Insight at: www.emeraldinsight.com/0128-1976.htm conventional insurance on matters relating to taxation. This has brought about a debate among stakeholders due to the difference in nature between takāful and conventional insurance. Takāful represents a tabarruʿ-based service with mutual risk being shared among the participants and the takāful operator acting as a manager of the funds. Conventional insurance, on the other hand, consists of an insurance premium being paid in exchange for coverage by the insurance company. This research aims to investigate the Sharīʿah stance on imposing GST on tabarruʿ-based takāful products. Research objectives The specific objectives of this research are as follows: to study the philosophy and purposes of GST; to analyze the structure of GST that is applied on takāful products in Malaysia; to make a comparison between conventional insurance and takāful in terms of GST as well as the tax neutrality concept; and to probe into the Sharīʿah texts and the opinions of classical and contemporary Sharīʿah scholars on the issues of taxation in Islam, the concept of charity in Islam, and the taxation of charitable work and takāful practice. The general basis of takāful Takāful provides an alternative to conventional insurance through the application of certain Islamic principles. These principles, to name a few, include tabarruʿ(donation), taʿawun (mutual cooperation) and wakālah (agency). The general concept of takāful is based on the principle of mutuality. Rather than the risk being transferred to one party, a group of takāful participants collectively agree to share the risk. The participants share the risk by providing tabarruʿto a common pool, with the takāful operator acting as a fund manager. The collective donation of the takāful participants in tabarruʿ-based takāful is thus used to help one another in the case of loss suffered by one of the participants. The application of goods and services tax in the takāful industry The main feature of this newly introduced GST is that all goods and services provided in the country shall be subject to 6 per cent tax, unless otherwise stated by the law. For takāful, family takāful products that provide death or total permanent disability coverage are exempt from GST. This means that other types of general and family takāful coverage such as medical, vehicle, personal accident, critical illnesses and financial liabilities are considered taxable. Besides that, any fees and charges incurred on the supply of services are also subject to GST. The GST guidelines do not specify what is taxable, whether it is the whole contribution (premium) paid by a participant or only the amount that is paid to the risk fund (tabarruʿamount). For investment-linked takāful products, the practice is to chargeGSTonlyonthetabarruʿamount as the investment and savings are exempt from GST. However, the takāful industry seems to differ in its practice regarding the traditional products that are not linked to any investment funds. The reasons cited by those who charge GST at the contribution level are: IJIF 9,2 206 to be more prudent and be on the safe side in terms of abidance by the law; to be equal with the practice of conventional insurance; and to cut cost by sharing the system with their conventional parents. Muslim scholars’views on taxation Besides zakāh(almsgiving) as a financial obligation on Muslims, Muslim scholars also unanimously allow three types of taxes to be imposed on non-Muslims, namely, jizyah,kharāj and ʿushr, based on the tradition of the Rightly Guided Caliphs and ijmaʿ(consensus). Jizyah is a per capita yearly tax historically levied by Islamic states on every non-Muslim residing in Muslim lands. Kharājis a tax on agricultural land and its produce. ʿUshr is a tax on merchandise imported from foreign states that tax the Muslims on their products (Al-Rais,  Diyaʾuddīn, 1985, p. 127; Al-Mawsūʿah al-Fiqhiyyah al-Kuwaitiyyah, 2007, vol. 15, pp. 95-97). Many scholars, especially from the  HanafīSchool, also agree that one-fifth of any minerals, metals, precious stones and jewelleries extracted from the earth is to be paid to the government (Al-Mawsūʿah al-Fiqhiyyah al-Kuwaitiyyah, 2007, vol. 23, p. 100). Some scholars mention consensus that no tax can be levied on any local goods sold domestically unless it is taken and treated as zakāh, which is limited to the rate of 2.5 per cent annually (Ibn  Hazm, n.d., p. 121; Al-Māwardī, n.d.,p.309;Al-Dardīr, n.d. vol. 2, p. 322; Al-Rais,  Diyaʾuddīn, 1985, p. 128). There is also consensus among classical Muslim scholars to allow the government to collect some of the extra wealth of the rich on a temporary basis in urgent and exceptional cases, such as during war, famine, catastrophe, on the strict condition that the government’s coffers are empty and the available resources are not sufficient to meet the needs of the poor and the needy or the expenditures of the army (al-Juwaynī, 1401H, p. 259; Ibn al-ʿArabī, 2003,vol.1,p.88;Al-Qur  tubī, 1964, vol. 2, p. 242; Al-Nawawī, 1991,vol.2,p.321; Al-Qaradāghī,n.d.). The allowance has been broadened by some contemporary scholars, for example, the former grand imam of Azhar University, Ma  hmūd (2004, p. 109), who allowed the government to levy tax on the people for the purpose of general public interest such as building hospitals, institutions of learning, roads and others. He also allowed taxes to be deducted from people’s money before payment of zakāh.Al-Qara  dāwī(2000, vol. 2, pp. 297-310) also agrees on the matter of taxation for the public interest with certain conditions. The Malaysian National Fatwa Committee, in its resolution, allowed implementation of GST. Research findings The research finds that by applying a strict interpretation of the Sharīʿah, as supported by the consensus reported by Ibn  Hazm, al-Mawardīand others, GST as a tax on local supplies of goods and services should not be permissible. Moreover, the structure of GST levies the tax on all consumers without differentiating between the rich and the poor. However, there is still room for the government to justify the implementation of GST using a broader interpretation of ma sla  hah (public interest). Takāful, as a new financial product, has become a need of the society and it is subscribed to not only by the rich but also by all income groups. Hence, the government should consider exempting takāful products from GST. Goods and services tax on takāful products 207 Taxation can be benchmarked to zakāh, as they share many similarities in terms of their purpose and objective. Moreover, taxation is allowed by the scholars only when zakāhis not sufficient to support the needs of the people. In takāful practice, as takāful is a form of charity (tabarruʿ), the tabarruʿfund (risk fund) may be deemed as not being liable to zakāh (AAOIFI, Standard No. 35, 3/1/5 and 5/3/5). Hence, on this ground, the GST should not be levied on the risk fund. However, on the other hand, the charitable (tabarruʿ) nature of takāful –especially in the Malaysian practice –is not absolute, as the contribution paid by the participants is still considered to be owned by them and the surplus of the fund is also shared among them. On this basis, the fund may be deemed to be liable to zakāhand, hence, GST is justifiable. This is analogous to the case of family waqf (waqf ahlī) where the waqf (endowment) beneficiaries are still liable to pay zakāh(AAOIFI Standard No. 35, 3/1/6). In summation, having the element of tabarruʿdoes not necessarily eliminate the duty of zakāh or tax. Conclusion and recommendations The research concludes that Sharīʿah evidence does not support GST and that those who allow it apply a broad interpretation of ma sla  hah to justify it. However, the research also concludes that having tabarruʿas the basis for takāful is not a strong argument for objections to the imposition of GST on takāful products. However, this research recommends that the government review the imposition of GST on the ground that takāful has become a need of the people, whether rich or poor. The paper also recommends a thorough study be conducted on the contemporary interpretation and application of zakāh on trade merchandise (zakātʿuru  d al-tijārah) as a more Sharīʿah-compliant alternative to GST. References Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) (2015), Sharīʿah Standards for Islamic Financial Institutions (English Version), AAOIFI, Manama. Al-Dardīr (n.d.), Al-Shar  h al-  Saghīr–bi  Hāshiyat al-  Sāwī,Dār al-Maʿārif, Cairo. al-Juwaynī(1401H), Ghiyāth al-Umam, Maktabat Imāmal- Haramayn, Cairo. Al-Māwardī(n.d.), al-A  hkām al-Sul tāniyyah,Dāral- Hadīth, Cairo. Al-Mawsūʿah al-Fiqhiyyah al-Kuwaitiyyah (2007 digital version), Ministry of Waqf, Kuwait. Al-Nawawī(1991), Raw  dat al- Tālibīn, al-Maktab al-Islāmī, Beirut. Al-Qaradāghī(n.d.), Hal Yajūz li al-  Hākim Far  d al-  Darībah bi Jānib al-Zakāh, available at: www. qaradaghi.com/chapterDetails.aspx?ID=502 (accessed 1 August 2016). Al-Qara  dāwī(2000), Fiqh al-Zakāh, English version translated by Monzer Kahf, King AbdulAziz University, Jeddah. Al-Qur  tubī(1964), Al-Jāmiʿli A  hkām al-Qurʾān,Dār al-Kutub al-Mi sriyyah, Cairo. Al-Rais,  Diyaʾuddīn (1985), Al-Kharāj wa al-Nu zum al-Māliyyah fīal-Dawlah al-Islāmiyyah,Dār al-Turāth, Cairo. Ibn al-ʿArabī(2003), A hkām al-Qurʾān,Dār al-Kutub al-ʿIlmiyyah, Beirut. Ibn  Hazm (n.d.), Marātib al-Ijmāʿ,Dār al-Kutub al-ʿIlmiyyah, Beirut. Ma  hmūd, S. (2004), Al-Fatāwā,Dār al-Shurūq, Cairo. IJIF 9,2 208 About the authors Burhanuddin Lukman is a Researcher-cum-Head of the Takaful Unit at the International Shari’ah Research Academy for Islamic Finance (ISRA). He holds a bachelor’s degree in Shariah from Islamic University of Medina, Saudi Arabia and a master’s degree in Fiqh and Usul al-Fiqh from Al al-Bayt University, Jordan. Burhanuddin Lukman is the corresponding author and can be contacted at: [email protected] Saba’Radwan Jamal Elatrash is a Research Officer at ISRA. She is currently completing her PhD in Laws. She holds a Masters of Law in Islamic Banking and Finance and a double degree in Bachelors of Law and Bachelors of Shariah Laws from the International Islamic University of Malaysia (IIUM). For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: [email protected] Goods and services tax on takāful products 209