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

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 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 tabarruʿ to 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 (tabarruʿ amount). For investment-linked takāful products, the practice is to charge GST only on the tabarruʿ amount 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:

• 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. Kharāj is 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, Ḍiyaʾuddīn, 1985, p. 127; Al-Mawsūʿah al-Fiqhiyyah al-Kuwaitiyyah, 2007, vol. 15, pp. 95-97). Many scholars, especially from the Ḥanafī School, 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 Ḥazm, n.d., p. 121; Al-Māwardī, n.d., p. 309; Al-Dardīr, n.d. vol. 2, p. 322; Al-Rais, Ḍiyaʾuddīn, 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-Qurṭubī, 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, Maḥmūd (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-Qaraḍāwī (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 Ḥazm, al-Mawardī and 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 maṣlaḥah (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.

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 zakāh is not sufficient to support the needs of the people. In takāful practice, as takāful is a form of charity (tabarruʿ), the tabarruʿ fund (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 zakāh and, 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 tabarruʿ does 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 maṣlaḥah to justify it. However, the research also concludes that having tabarruʿ as 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 (zakāt ʿuruḍ al-tijārah) as a more Sharīʿah-compliant alternative to GST.