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Monday, 1 April 2013

Saudi Arabia: When are we going to accept a role for taxes or Zakat?

One of the thorny perennial issues that governments and societies all over the world deal with is taxes.

A key problem in developing countries is the fact that the tax revenue in size and base is small to a point of impeding a balanced and sustainable economic development.

The availability of a tax system that is able to avail domestic financing is a key determinant for economic success and sustainability.

Intellectually, it would be very difficult to advance the idea to tackle the issue seriously in Saudi Arabia given the level of the government’s financial status.

The financial profile is dominated by distributional demands and total immersion in consumption at the expense of long-term economic and financial planning.

Intuitively, everybody would be up in arms against it, yet it is of strategic dimension and is probably timely.
For most, the talk of taxes is probably a non-starter and the reason is really two-fold. For one, the prevailing mindset is that a distributional nature where the sense of entitlement of the people is much stronger than the economic needs and imperatives to work, and the second is the tendency of governments to bank on the path of least resistance without due consideration to future planning.

The economic system has become addicted to top down government expenditure system that distorts as much as it contributes to the building of the society.

It fundamentally allows most people and many companies to skirt the productivity imperatives that are indispensable for real economic growth.

Taxes will go a long way in reordering the economic system structure where taxes or the zakat system are part of tools to affect policy and management in the economic realm.

In most developing countries, tax constitutes about 15-19 percent of GDP while in the advanced countries it is about 35 percent. I do not know the exact figures for the Kingdom but it is certainly less than 10 percent, according to initial data by Department of Zakat and Income. Hence, the road is long toward serious attempts to change the system conceptually and practically.

The taxation does not mean the elimination of distribution or subsidies as these are practiced in all countries at different degrees.

But it means change in the way we think about economic management.

Taxes are proven instruments to calibrate, incentivize, accelerate, and decelerate certain behaviors.

It plays a key role in bringing about a balance between investment and consumption, which is at the heart of economic management.

Productivity will not be part of the Saudi system without taxation or Zakat.

Unfortunately, for various reasons, Zakat has not been applied uniformly or consistently.

Intrinsically, the choice between Zakat and taxes is not really that different.

It is also conceivable that it can be better than taxes (since it is closer to a flat tax that has been popular recently around the world). In accounting terms, 2.5 percent Zakat on sales (assets) can work out to be around 20-30 percent of income approximating those of taxes.

The details should be refined by the accounting definitions and rules.

A key shortcoming has been the loose role of Zakat on real estate, particularly land and rent income, even salaries should be included at certain level.

There is a need for universities, especially Um Al-Qura University in Makkah, Imam University in Riyadh and research institutions to undertake serious studies to modernize Aakat and understand it better in terms of policy. There is a need for conceptual framework with taxation or Aakat at the center of the “new” economic order to affect better economic management and transform productivity in the society at large.

The key vexed issue of the national economic system is ability to upgrade productivity.

Taxes or zakat will likely engender rationality when it comes to subsidies and consumption.

I reckon that it would be very difficult to bring about meaningful improvement in productivity and real economic growth without tax or zakat system.

It is time for the Shoura Council and others to break the mold by bringing tax or Zakat to the center of economic policy making to prepare the economy for a new dawn.

(Arab News / 01 April 2013)

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