Implementation of Zakat as a Tax Incentive in Indonesia: A Comparative Analysis

Implementation of Zakat as a Tax Incentive in Indonesia: A Comparative Analysis

Sofyan Halim^*1, Anggia Dyarini M², Jundi Imam Suhada³, Noviendri Jalil⁴, Anasrul⁵

^1,2,3,4,5Universitas Ibn Khaldun-Bogor – Indonesia

¹Universitas Mercu Buana-Jakarta-Indonesia

⁴Universitas Yarsi-Jakarta-Indonesia

^*Corresponding Author

DOI: https://dx.doi.org/10.47772/IJRISS.2025.915EC004

Received: 03 January 2025; Accepted: 07 January 2025; Published: 06 February 2025

ABSTRACT

Zakat, as an important instrument of fiscal incentives, plays an important role in facilitating wealth redistribution, reducing poverty, and increasing individual economic empowerment. This scientific article conducts a comparative analysis of the implementation of zakat within the framework of fiscal incentives in three countries: Indonesia, Malaysia, and Saudi Arabia. Indonesia recognizes zakat as a deductible expense, while Malaysia adopts a more progressive approach by categorizing zakat as a reduction in direct tax credits. In the context of Saudi Arabia, zakat serves as a fundamental mechanism for wealth redistribution, given that the state does not impose income tax.

The findings of the analysis show that the efficacy of zakat as a fiscal incentive largely depends on the quality of management, regulatory framework, and its integration with fiscal policy. In Indonesia, a centralized framework through the National Amil Zakat Agency (BAZNAS) faces bureaucratic barriers, while Malaysia uses a decentralized approach through state authorities that facilitates increased flexibility. Saudi Arabia uses zakat as the main instrument for redistribution, supported by the religious values upheld by its population.

The allocation of zakat funds for economic empowerment initiatives, which includes education financing, micro-business capital, and social development, has been proven to encourage social justice-oriented economic growth. To optimize zakat profits, it is recommended to increase digitalization, implement professional management practices, foster collaboration with the private sector, and ensure transparency and accountability in the distribution of funds.

In short, zakat goes beyond its role as a mere religious obligation, emerging as an effective fiscal tool to promote inclusive and sustainable economic growth. Through the integration of technology-based policies and innovative management strategies, zakat has the potential to serve as a strategic response to contemporary economic challenges while strengthening public trust in government institutions and zakat.

Keywords— Zakat, fiscal incentives, wealth redistribution, sharia economy, Indonesia, Malaysia, Saudi Arabia.

INTRODUCTION

Background of the Study

Taxes are a fundamental component of fiscal policy used by the government to regulate economic activities. In the Indonesian context, tax incentive strategies have historically been used to stimulate domestic investment and attract foreign direct investment (FDI). The main objectives of these tax incentives are to ease the financial burden on investors, foster a favorable business environment, and promote the advancement of priority sectors, including manufacturing, tourism, and technology. The government provides various incentive mechanisms, such as tax holidays, super deduction taxes, and tax allowances, as a key strategy aimed at gathering the interests of domestic and international investors. Nonetheless, the effectiveness of tax incentives remains a topic of debate. Empirical data show that while these policies can successfully attract large amounts of investment, the realization of anticipated benefits is often hampered by regulatory intricacies and suboptimal policy implementation. In addition, global competition to secure investment is becoming increasingly fierce.

In addition, especially in the Muslim demographic, there is a conflict regarding the obligation of zakat, which requires synchronization between tax regulations and sharia zakat provisions. Taxation and zakat function as two financial instruments that are mainly aimed at strengthening the economy and improving people’s welfare. In Muslim-majority countries such as Indonesia, Malaysia, and Saudi Arabia, zakat occupies an honorable position because it is governed by Islamic sharia. However, the regulatory framework and application regarding zakat in relation to taxation show considerable differences. This paper seeks to explain the synchronization of tax regulations in these three countries by juxtaposing zakat provisions related to Muslims.

Zakat, as a fundamental pillar of Islam, has significant potential to contribute to economic and social development in society. In addition to serving as a spiritual task, zakat can serve as an effective mechanism to reduce poverty and improve overall well-being through the redistribution of wealth. The incorporation of zakat as a tax incentive can motivate a large number of individuals and companies to engage in philanthropic efforts, thus fostering synergy between religious obligations and social responsibility. By integrating zakat into the tax framework, the government can increase transparency and accountability in the management of zakat funds, which further increases public trust in the institutions responsible for managing zakat.

In addition, cooperation between government agencies and zakat institutions can facilitate the creation of programs that are more targeted and efficacious in overcoming social challenges, such as education, health, and infrastructure, resulting in a wide positive influence on society. The implementation of this strategy is not only poised to reduce economic inequality but also to foster a sense of solidarity and social responsibility among members of society. As a result, the initiative has the promise of building a more inclusive and sustainable ecosystem, where each individual feels their role in the nation’s social and economic progress. Therefore, it is imperative that all stakeholders demonstrate a commitment to fulfilling their respective roles to achieve common goals. By involving various elements of society, including the private sector and non-governmental organizations, this collaboration can expand the reach of zakat initiatives and ensure that the support provided is in line with the original needs that exist within the community. In addition, it is very important to conduct periodic assessments of the programs implemented to ensure their success and the challenges faced during implementation. Thus, corrective actions can continue to be refined and improved to produce a more substantial impact on community empowerment. Thus, the improvement measures taken can continue to be adjusted and improved to achieve a more significant impact in community empowerment. (Muhafidin, 2023).

In addition, the incorporation of zakat into the existing taxation framework can significantly promote a culture of financial literacy and ethical accountability among the community. By disseminating knowledge about obligations related to zakat and taxation, it becomes feasible to cultivate a society that has a deeper understanding of the importance of this contribution in advancing social welfare. For example, empirical studies have shown that when communities engage in zakat-focused educational programs, there is an important increase in overall levels of compliance and participation in philanthropic activities. This not only strengthens the efficacy of zakat as an instrument of poverty alleviation but also strengthens community cohesion by encouraging collective action towards a common goal. Ultimately, such efforts could trigger a paradigm shift in which philanthropic involvement is seen as a civic obligation, thus reinforcing the link between religious duty and societal progress.

The potential of zakat as a fiscal mechanism goes beyond the field of mere compliance and participation; It can also create economic resilience in the community by establishing sustainable financial flows for local development initiatives. For example, when zakat resources are wisely allocated to support small businesses or vocational training programs, they not only offer direct fiscal support but also empower individuals with the skills necessary for lasting self-sufficiency. This double benefit is in line with Islamic principles that highlight charity and economic empowerment, thereby strengthening social equality while invigorating the local economy. In addition, collaboration between government agencies and zakat institutions can facilitate the emergence of innovative financing models that utilize these funds similar to microfinance initiatives, thereby attracting additional investment to underserved areas. As a result, the integration of zakat into broader economic strategies can yield huge dividends in terms of poverty reduction and community development, ultimately contributing to a stronger national economy. The implementation of this strategy will not only improve the well-being of individuals but also result in a more stable and sustainable environment, where everyone is given the opportunity to thrive and contribute positively to their communities. The initiative can also result in cooperation between the public and private sectors, creating synergies that support sustainable development efforts at the local and national levels.

Darvina Darvina, Safrudin Halimy Kamaluddin, Muhammad Ridho Nur (2020), in their scientific investigation, did not explicitly discuss the application of zakat as a tax incentive in the context of Indonesia, Malaysia, and Saudi Arabia. Their work mainly emphasizes the comparative analysis of zakat and taxation in Indonesia from a favorable point of view. In this study, a comprehensive comparative exploration between zakat and taxation requires further investigation, as the assessment of the social impact of these financial obligations is relatively limited.

(Setianingrum et al., 2019), in their study, considered the integration of zakat (a form of alms in Islam) with tax policy in Indonesia, underlining the need for effective management to strengthen tax revenue. It emphasizes that zakat should not be considered as just an expense but rather as a potential source of income that can add to tax revenue.

Harmonization of tax laws with the provision of zakat obligations has also been implemented in neighboring Malaysia, while the Kingdom of Saudi Arabia in the Middle East has adopted a similar approach. As a member of the G-20, this study seeks to conduct a comparative analysis of fiscal policy, especially the tax laws of each country and their implementation in Indonesia, which has also been involved in the harmonization effort since 2008.

Researchers Low Mei Peng, Chung Chay Yoke, Tee Peck Ling, Shamini Kandasamy, and Ung Leng Yean (2019) have conducted an empirical investigation on Tax Incentives, titled “A Review of Current Tax Incentive Matters Among Companies in Malaysia.” The findings of this study ensure that, despite the potential for tax incentives to catalyze environmental progress within Malaysian companies, substantial barriers and awareness deficits currently limit their efficacy. Improved communication strategies and efficient procedural frameworks are essential to optimize the benefits associated with these incentives.

Irwanto, Meilani (2022), conducted a comparative analysis of tax incentives throughout Indonesia, Malaysia, and the United States, especially in the context of research and development programs. His review culminated in the statement that research and development are essential for stimulating a country’s economic expansion. Furthermore, it is observed that effective tax incentives can facilitate research and development initiatives. Indonesia is urged to portray research and development for taxation purposes, while Malaysia’s research and development incentives are hailed as a successful paradigm. In addition, adverse tax incentives must be systematically reduced.

Eko Suprayitno, Radiah Abdul Kader, and Azhar Harun (2013) conducted a thorough examination of Zakat as a Tax Benefit and its implications for Tax Revenue in Peninsular Malaysia. Their study concluded that the administration of Zakat in Malaysia has been systematically managed since the advent of Islam and continues to evolve. Although there are differences in management practices in different states, such variations do not undermine people’s tendency to submit zakat. Zakat payments can completely reduce tax liabilities, thereby freeing zakat contributors from further tax liabilities and avoiding the incurrence of double taxation. The affirmative effect of zakat on income tax is evidenced by research that shows that zakat has a positive and statistically significant effect on government tax revenue. The increase in zakat expenditure correlates with the increase in tax revenue, suggesting that concerns about the potential of zakat to reduce income tax without tax compliance incentives are unfounded. With zakat serving as a regulatory mechanism for taxation, Muslim communities are incentivized to demonstrate greater equality in their tax reporting. This creates a responsibility for them to adequately meet their tax obligations, which, effectively regulated, can increase government tax revenues. Fair distribution of capital reduces the government’s fiscal burden related to group management needs. Through well-structured policies, governments can shift some of their financial obligations to zakat, allowing for increased focus on routine administrative functions and other development initiatives. With regard to the increase in investment and consumption, it is said that zakat allocated to the poor and influential can strengthen consumption and investment, thereby fundamentally increasing trade profits and tax revenues. This shows that zakat functions not only as an instrument for wealth redistribution but also as a catalyst for economic development.

Muhammad Redha Anshar (2019) conducted a scientific investigation of Zakat as a Tax Deduction within the framework of Indonesian Law. This discourse evaluates the function of zakat as a tax reduction mechanism in the Indonesian legal environment, concluding that zakat can increase social responsibility and compliance among Muslim communities, although the overall impact on tax compliance is mixed. This duality can result in reduced taxable income and potential tax evasion, while simultaneously maintaining a culture of compliance driven by religious imperatives. The strategies used in government regulations and the clarity of zakat laws play a role in influencing this complex dynamic.

The research of Farhatun Nisa et al. (2024) highlights the role of zakat in Indonesia’s tax policy, finding great potential to improve social welfare. Meanwhile, Ridwan M’s (2016) research compared zakat and taxes in Muslim countries, finding that both have different goals and rules. Zakat as a religious obligation and taxes as a civil obligation.

Countries such as Saudi Arabia and Malaysia have a unique approach to integrating zakat into the tax system, allowing for a reduction in the tax burden for citizens who meet their zakat obligations. Indonesia also applies a similar approach.

This study emphasizes the importance of understanding the difference between zakat and taxes to increase state revenue and social welfare.

Purpose of Study and Problem Formulation

This study aims to analyze the implementation of zakat as a fiscal incentive in Indonesia, Malaysia and Saudi Arabia. The focus is:

Addressing economic and social disparities through zakat.

Optimizing zakat as a tool for wealth redistribution and economic empowerment.

Integrating zakat into the fiscal system to promote social justice and inclusive economic growth.

LITERATUR REVIEW

1. Previous Research

This study conducts a comparative analysis of tax and zakat regulations in Muslim countries (Indonesia, Malaysia, Saudi Arabia) to identify the synchronization and differences in the application of zakat as a financial instrument.

Tax Regulations in Indonesia, Malaysia, and Saudi Arabia

a. Indonesia

Indonesia operates a progressive taxation system based on the Tax Law and regulates the management of zakat through Law No. 23/2011. Zakat payments through official institutions can cause a reduction in taxable income, providing incentives for Muslim taxpayers.

b. Malaysia

Ledy Farmulia’s (2020) research examines the relationship between zakat and taxes in Indonesia, Malaysia and Brunei. The results show that Malaysia has succeeded in increasing zakat receipts through the tax rebate policy, while Indonesia uses deductible expenses. Brunei separates zakat from taxes and still manages zakat without individual taxes.

c. Arab Saudi

Taxation and zakat provisions in Saudi Arabia serve as complementary mechanisms for wealth redistribution and fiscal policy. Zakat is a religious obligation, functioning similarly to taxation by promoting social equality and economic stability.

Saudi Arabia has adopted a tax system aimed at supporting economic diversification within the framework  of Saudi Vision 2030. The main goal of this system is to reduce the country’s dependence on oil revenues and create a more stable source of income. Here are the details of the main tax provisions in Saudi Arabia:

1) Value Added Tax (VAT)

• Implementation: Introduced on January 1, 2018 with an initial tariff of 5%, then increased to 15% in 2020.
• Coverage: VAT covers most goods and services, with exceptions in certain sectors such as education, healthcare, and financial services.
• Objective: Provide sustainable revenues to support fiscal stability and reduce the deficit stemming from the decline in oil prices.

2) Foreign Company Income Tax

• Individuals: Saudi Arabia does not impose personal income taxes on individuals.
• Company:
  • Non-oil companies are subject to an income tax of 20% on profits earned.
  • Companies in the energy and oil sectors are subject to higher tariffs under special agreements between the government and related companies, such as Saudi Aramco.

3) Excise Tax

• Types of taxable goods:
  • 100% for tobacco and its derivative products.
  • 50% for soft drinks.
  • 100% for energy drinks.
• The purpose of the implementation of the Certain Goods Tax is to encourage healthy consumption behavior and reduce negative impacts on the environment.

4) Tax Incentives

Saudi Arabia provides tax exemptions to: attract foreign investment, especially in special economic cities such as the King Abdullah Economic City, as well as projects that support economic diversification and the establishment of regional offices by foreign companies.

5) Tax Authority

Tax Management in Saudi Arabia is managed by the Zakat, Tax, and Customs Authority (ZATCA), which oversees tax-related compliance, collection, and regulation.

Al-Omar, F. (2017), conducted an analysis with the study  “Zakat and corporate taxation in Saudi Arabia: A comparative analysis.”, in his study found the following:

1. Zakat as an Islamic Financial Instrument:

• Zakat in Saudi Arabia is treated separately from taxes, unlike in other countries that incorporate zakat as a tax deductible.
• The zakat rate is set at 2.5% of working capital or certain assets, based on Islamic law.
• Zakat is only imposed on Saudi companies and individuals, while foreign companies are subject to an income tax of 20%.

2. Fiscal Burden Comparison:

• Local Saudi companies pay zakat which is relatively lower compared to the income tax rate imposed on foreign companies.
• This lighter fiscal burden creates incentives to support local companies and encourage the sustainability of sharia-based businesses.

3. Fiscal Efficiency and Compliance:

• Zakat provides fiscal stability because it is managed directly by the Zakat, Tax, and Customs Authority (ZATCA), which integrates zakat collection with the country’s fiscal policy.
• However, this study notes the challenges in increasing compulsory zakat compliance, especially in the context of multinational companies operating in Saudi Arabia.

Global Comparison:

• The results of the analysis highlight that in countries such as Malaysia and Indonesia, zakat can be calculated as a tax rebate, which provides flexibility to taxpayers.
• In contrast, in Saudi Arabia, zakat is not treated as a tax incentive but rather as a stand-alone obligation.

2. Comparison of Zakat Management in the Three Countries’

a. Indonesia

Zakat is managed by official institutions such as Baznas and LAZ with government supervision. The management of zakat aims to increase transparency and efficiency in the distribution of funds to mustahik (zakat recipients). The zakat system as a reduction of PKP in Indonesia is one of the incentives for Muslim taxpayers.

b. Malaysia

Malaysia integrates zakat into its tax system through a direct tax credit mechanism. This makes zakat not only recognized as a religious obligation but also as the main element in tax calculation. Zakat is managed by the State Islamic Religious Council, which has authority in the management of people’s funds.

c. Arab Saudi

Saudi Arabia places zakat as the main obligation in its fiscal system. Zakat is considered a tax substitute for Muslim citizens. GAZT is fully responsible for the collection and distribution of zakat, ensuring that the funds are used in accordance with Islamic sharia principles.

Al-Omar, F. (2017), in his research stated that:

• Zakat as an Islamic Financial Instrument:
  • Zakat in Saudi Arabia is treated separately from taxes, unlike in other countries that incorporate zakat as a tax deductible.
  • The zakat rate is set at 2.5% of working capital or certain assets, based on Islamic law.
  • Zakat is only imposed on Saudi companies and individuals, while foreign companies are subject to an income tax of 20%.
• Fiscal Burden Comparison:
  • Local Saudi companies pay zakat which is relatively lower compared to the income tax rate imposed on foreign companies.
  • This lighter fiscal burden creates incentives to support local companies and encourage the sustainability of sharia-based businesses.

• Fiscal Efficiency and Compliance:
  • Zakat provides fiscal stability because it is managed directly by the Zakat, Tax, and Customs Authority (ZATCA), which integrates zakat collection with the country’s fiscal policy.
  • However, this study notes the challenges in increasing compulsory zakat compliance, especially in the context of multinational companies operating in Saudi Arabia.
• Global Comparison:
  • The analysis highlights that in countries such as Malaysia and Indonesia, zakat can be counted as a tax rebate, which provides flexibility to taxpayers.
  • In contrast, in Saudi Arabia, zakat is not treated as a tax incentive but rather as a stand-alone obligation.

3. Implementation of Zakat on Tax Provisions

As tax incentives vary widely between Indonesia, Malaysia, and Saudi Arabia, reflecting each country’s unique approach to integrating religious obligations with fiscal policy. This integration aims to improve social welfare while ensuring adherence to Islamic teachings. Below are the key aspects of the implementation of zakat in the following countries.

1. Indonesia

a. Tax Deduction:

Zakat can be deducted from taxable income, allowing taxpayers to reduce their tax liabilities (Bayinah, 2019).

Bayinah’s research (2019) analyzes the relationship between taxes, economic justice and social welfare. The results show that progressive taxes and zakat can increase the purchasing power of the poor and stimulate economic activity. Citizens must understand their rights and actively participate in tax issues to achieve the goal of fiscal stabilization. Any Setianingrum, Suhirman Madjid, Masagus Asaari, (2018), conducted a study on the harmonization of zakat as a tax credit set in fiscal policy in Indonesia by highlighting the potential of integrating zakat (a form of alms in Islam) into the tax system in Indonesia as a tax credit.

This integration can help reduce the overall tax burden for Muslim taxpayers, making it more attractive for them to meet their zakat and tax obligations simultaneously.  By recognizing zakat as a tax credit, the government can increase the collection and collection of zakat as a whole. This approach is more profitable than treating zakat only as a deductible expense from taxable income. Research shows that this policy is in line with the principles outlined in PSAK 101, which states that zakat should not be included in the income statement. This means that zakat can be treated separately from other forms of income, thus simplifying financial reporting for individuals and organizations.

Darvina’s research, Safrudin Halimy Kamaluddin, Muhammad Ridho Nur (2020) discusses the role of taxes and zakat in Islam, emphasizing the importance of both as a source of state revenue and a religious obligation. This research highlights the significance of taxes and zakat in creating a just, prosperous society and meeting material and spiritual needs.

Farhatun Nisa, Agus Puji Priyono, Anggraeni Dwijayanti (2024), in the study reached a key conclusion, with the following explanation:

1. Integration of zakat in taxes: Zakat is currently recognized as a reduction in taxable income in Indonesia, which can increase its impact on social welfare. This integration has the potential to increase voluntary tax compliance and positively influence the behavior of muzakki (zakat payers).
2. Regulatory framework: The treatment of zakat for payers and recipients is specifically regulated based on Indonesian law, especially in Government Regulations PP 60 of 2010 and PP 18 of 2009. This regulation outlines how zakat can be used as a tax deduction
3. Tax benefits for individuals: Individual Taxpayers in Indonesia can reduce their tax liability by claiming zakat payments as a deduction from their total taxable income. This mechanism is designed to encourage zakat contributions while reducing the tax burden on individuals.
4. Zakat reduction requirements: To be eligible for tax deduction, zakat payments must be made through a government-recognized institution, and proper documentation, such as a receipt from BAZ (Amil Zakat Agency) or LAZ (Amil Zakat Institute), is required.
5. LAZ’s performance: KBB LAZ Rumah Peduli Umat has shown a significant increase in the collection and distribution of zakat, with an increase of 753.7% in collection and 681.8% in distribution during 2021-2022. This success is attributed to effective promotion strategies and active volunteer contributions.

b. Public Awareness:

There is a need for a greater public understanding of these regulations to maximize their benefits (Bayinah, 2019).

Farhatun Nisa, Agus Puji Priyono, Anggraeni Dwijayanti (2024), in the study reached a key conclusion, with the following explanation:

1. Challenges in awareness and use: Despite the benefits, there is a gap in understanding and utilizing zakat as a tax reduction among muzakki. Some professionals, particularly doctors, have been noted to actively use zakat for tax deductions, demonstrating the need for better awareness and education on the issue.
2. The need to improve communication: The study emphasizes the need for more intensive and targeted outreach efforts to ensure that all muzakki are aware of their right to use zakat as a tax deduction, which can lead to increased compliance and participation.

c. Potential Tax Credit:

Research shows that treating zakat as a tax credit can further increase tax revenue and compliance among Muslims (Setianingrum et al., 2019)

Research by Setianingrum et al. (2018) proposes a policy change that recognizes zakat as a legal means of tax payment. This approach can create a more harmonious fiscal environment in Indonesia, increase tax revenues, and support the social responsibility of the Muslim community.

2. Malaysia

Charity as a Tax Deduction: Zakat payments can be claimed as tax deductions if they are made to officially recognized charitable institutions (Ridwan, 2016)].

Government Support: The Malaysian government is actively promoting zakat as part of its tax system, increasing its role in poverty alleviation and economic development (Darvina et al., 2020).

Low Mei Peng, Chung Chay Yoke, Tee Peck Ling, Shamini Kandasamy, Ung Leng Yean (2019), in their study concluded their findings as follows:

1. Lack of utilization of tax incentives: The study highlights that despite the various tax incentives available, many companies do not take full advantage of them. Most respondents (65.4%) were unaware of the incentives, indicating a critical gap in awareness and understanding of these opportunities.
2. Need to improve communication: The findings suggest that governments and tax authorities need to improve their communication strategies regarding tax incentives. The lack of awareness and understanding among companies indicates the need for better outreach and education about the procedures and benefits associated with tax incentives.
3. Barriers to application: The study identifies several barriers that prevent companies from applying for tax incentives, including complicated procedures, time-consuming requirements, and a lack of perceived benefits. Overcoming these barriers is critical to increasing participation in tax incentive programs
4. Potential environmental improvements: Despite the low application rate, there is a consensus among respondents that tax incentives can significantly improve their company’s environmental performance. This suggests that if companies are more aware and engaged, tax incentives can lead to better environmental practices and reduced pollution.
5. Recommendations for policymakers: This paper suggests that policymakers consider simplifying the application process and providing clearer guidelines to encourage more companies to take advantage of tax incentives. Additionally, promoting the benefits of these incentives can motivate companies to engage more actively in environmentally friendly practices
6. Future research direction: This study also shows the need for further research to explore the specific factors that influence the implementation of tax incentives among different types of companies in Malaysia. This can help in tailoring strategies that effectively address the unique challenges faced by different sectors.

3. Arab Saudi

Single Liability: In Saudi Arabia, Zakat is the main obligation, and citizens are not required to pay additional taxes if they fulfill their zakat obligations (Ridwan, 2016).

State Management: The government manages the collection of zakat, ensuring that funds are directed to social welfare initiatives (Ridwan, 2016).

While the integration of zakat into the tax system can improve social equality and economic development, challenges remain, such as public awareness and administrative efficiency in managing the fund.

Ridwan M (2016) proposed the integration of zakat into the tax system to improve tax compliance and overcome budget deficits in Muslim-majority countries. This approach takes into account cultural and religious sensitivities, increases government-citizen trust and reduces dependence on other taxation.

Al-Omar’s research (2017) analyzed the zakat system in Saudi Arabia, finding fiscal benefits for local companies and potential discrimination. This study recommends the adoption of a tax reduction mechanism based on zakat to improve fiscal efficiency and sharia compliance.

THINKING FRAMEWORK

A framework of thought is a conceptual picture that explains the relationships between concepts in a study, which helps explain how problems are analyzed and solved. The framework of this paper is explained as follows:

1. Problem Identification

The main issue raised is how zakat, as a religious obligation in Islam, can be used as an instrument of fiscal incentives to support wealth redistribution, alleviate poverty, and encourage economic growth based on social justice. Economic disparities and the ineffectiveness of some conventional fiscal policies are the background for the need to integrate zakat in modern fiscal policies.

2. Conceptual Approach

This study uses two main concepts to analyze the problem:

• Fiscal Incentives: Government policies in the form of tax reductions or zakat recognition to encourage certain economic behaviors, such as zakat payments and social investments.
• Zakat as an Instrument of Sharia Economy: Zakat is understood as a religious obligation that has the potential to redistribute wealth to create a socio-economic balance.

3) International Comparison

This study compares the implementation of zakat in fiscal policy in three countries:

1. Indonesia: Integrating zakat in the tax system with a mechanism to reduce taxable income (deductible expense). However, centralized management through BAZNAS faces bureaucratic challenges.
2. Malaysia: Using a more progressive approach by making zakat a tax credit, managed in a decentralized manner by state authorities.
3. Saudi Arabia: It has no income tax, so zakat is the only instrument of wealth redistribution, supported by the religious values of its people.

4) Concept Relationship Analysis

1. Fiscal Policy Effectiveness: Zakat as a fiscal incentive is considered effective if it meets several criteria, such as ease of payment, transparency of management, and targeted utilization.
2. Influence on the Economy: Zakat has a direct impact on reducing social inequality through wealth redistribution, and an indirect impact through increasing the purchasing power of zakat recipients.
3. Management Challenges: The differences in zakat management systems in the three countries show that transparency, accountability,

5) Strategic Conclusions and Recommendations

Zakat has great potential to be integrated into the fiscal system as an instrument of wealth redistribution and economic empowerment. Professional management, a transparent supervision system, and innovations in fiscal policy will increase the effectiveness of zakat in supporting sharia-based economic growth.

Several recommendations were given to maximize the potential of zakat, such as:

• Increasing the digitization of the zakat payment system.
• Strengthen collaboration with the private sector.
• Developing innovative fiscal policies, such as tax credits.
• Prioritizing transparency and accountability in the management of zaka

RESEARCH METHODS

A descriptive-qualitative approach is used to describe tax incentive policies in Indonesia based on secondary data.  The Secondary Data are : Analysis of Tax laws and regulations, articles and books on the implementation of tax incentives in other countries and related theories.  The data was analyzed using a comparative descriptive approach to describe, as well as compare policy implementation with other countries.

This study is part of a literature study and comparative analysis of zakat policies in Indonesia, Malaysia, and Saudi Arabia, as well as identifying the advantages, weaknesses, and potential for the development of zakat policies in each country.

DISCUSSION OF THEORIES AND FINDINGS

a. Tax Insentif

Fiscal incentive theory is an economic policy concept that aims to increase investment and economic growth through tax incentives. This policy is based on the principle that taxes affect the cost of capital structure, so tax reductions can create a more competitive investment environment.

Fiscal incentives are government policies that aim to encourage certain economic activities through the reduction of the burden of taxes or other expenditures. These incentives can be in the form of reduced tax rates, tax exemptions, or other mandatory expenditure reductions, aimed at:

• Increase investment.
• Encourage economic growth.
• Overcoming economic inequality.
• Supporting strategic sectors or economies based on certain values such as sharia economics.

Fiscal incentives, particularly through zakat, play an important role in the economies of Indonesia, Malaysia, and Saudi Arabia. Zakat, as a form of Islamic fiscal policy, not only tackles poverty but also stimulates economic growth by redistributing wealth.

b. Zakat as a Fiscal Incentive Tool

Zakat is an obligation for Muslims to give a certain part of their wealth to a group in need, as mentioned in Surah Al-Baqarah verse 43 Allah says:

And establish the prayer, and give the zakat, and bow down with the kneeling.

Meaning: And establish prayer, pay zakat and rukuk with those who are rukuk.

The meaning of the verse, especially related to zakat according to the tafsir of Al-Wajiz by Shaykh Wahbah Azzhuhaili, states that it is obligatory for Muslims, to pay the obligatory zakat (given) to those who are entitled to receive it, submit to the commandments of Allah, pray in congregation with those who pray and perfect your rukuk .

In the context of Islamic economics, zakat has the effect of fiscal incentives as:

• Instrument of Wealth Redistribution: Prevents the concentration of wealth in a few parties.
• Supporting Economic Growth: By flowing funds to low-income people, purchasing power increases, so that the economy rotates.
• Tax Deduction/Tax Credit: Zakat is often recognized as a tax burden reduction to encourage compliance.

Each country uses zakat differently in its fiscal framework, reflecting their unique economic context and policies

c. Fiscal Incentives and Zakat in Indonesia

In Indonesia, fiscal incentives in the form of zakat recognition have a clear legal basis. The zakat system was developed through a formal approach by integrating it into the state tax system.

Zakat is integrated into the tax system, allowing individuals to deduct zakat payments from their taxable income. This approach encourages zakat contributions while overcoming poverty and stimulating economic activities (Ridwan, 2016)

According to researcher Ibrahim A, (2011), in a study entitled “Maximizing Zakat as One of the Fiscal Components in the Islamic Economic System” presents several important findings regarding the role of zakat in the Islamic economic system, especially in Indonesia. The following are the findings:

• Increasing Zakat Potential: Research shows that the potential for zakat in Indonesia continues to increase every year. In 2010, the potential of zakat is estimated to reach Rp.27.2 trillion, and the Asian Development Bank projects to reach Rp.100 trillion. This significant increase highlights the importance of zakat as a fiscal component in the economy.
• Zakat as a Stabilization Tool: This paper argues that zakat can be effectively utilized as a stabilization tool within the framework of Islamic economics. During times of economic decline or inflation, some of the zakat funds can be withheld and then released to increase purchasing power, thus helping to stabilize the economy during periods of depression.
• Ideological Orientation of Fiscal Policy: This study emphasizes that fiscal policy in the Islamic context should not be values-neutral but should be aligned with Islamic principles. This ideological orientation is very important for the effective implementation of fiscal policy, including the use of zakat

The main findings of the Ibrahim A Study (2011) stated that zakat has great potential and is growing in Indonesia, which can be used as a fiscal tool to stabilize the economy, especially during challenging economic times. The ideological framework of Islamic economics plays an important role in shaping how zakat is used in the fiscal policy landscape.

In the research conducted by Muhammad Thamrin, Faisal Eriza, Muh. Faisal, I.K. Nasution, Afrizal, Maulana Andinata Dalimunthe (2023), with a study on Religiosity in Paying Zakat and Tax Compliance in Medan City. Based on research, it was found that the level of religiosity among individuals in the city of Medan has a significant impact on their compliance in paying zakat. People with stronger religious beliefs are more likely to meet their zakat obligations, which can also lead to better tax compliance.  This study reveals that many individuals in the city of Medan are not fully aware of the policies that allow zakat payments to be deducted from their taxable income. This lack of knowledge limits the effectiveness of zakat as a tool to reduce the tax burden.

It is noted that trust in local zakat institutions plays an important role in encouraging people to pay zakat. Many people prefer to give zakat to institutions they know rather than government-recognized organizations. This preference stems from a strong sense of community and a desire for effective zakat distribution.

This research highlights that the moral community in the city of Medan is very important in raising awareness about the importance of zakat and its relationship with tax compliance. Community organizations and religious institutions are actively involved in educating the public on how zakat can be integrated into their tax obligations.  The study also shows that there are significant barriers to using zakat as a tax deduction. This includes a lack of understanding among taxpayers about the rules and conditions for withholding zakat, as well as inadequate information provided by zakat institutions.

Overall, the results of the study show that increased awareness and understanding of zakat and its benefits can lead to increased compliance in both zakat payments and tax obligations. This can ultimately contribute to better economic welfare for the people in the city of Medan.

The research of Muhammad Thamrin et al. (2023) analyzed the relationship between zakat, religiosity and tax compliance in Medan. The results show that moral communities, community organizations and religious institutions play an important role in raising awareness about zakat and tax compliance. This study recommends further research to study the relationship between religiosity, zakat and tax compliance.

Researcher Azharsyah Ibrahim (2023) in his research came to the following conclusions:

• Significant economic potential: This study concludes that zakat has considerable economic potential in Indonesia, with estimates indicating that it can reach Rp.100 trillion. This potential is not only significant for the Islamic economy but also for the country’s overall fiscal landscape, showing that zakat can play an important role in economic development and poverty alleviation
• Zakat as a fiscal tool: This paper emphasizes that zakat can be used effectively as a fiscal tool to stabilize the economy. By strategically withholding and releasing zakat funds during periods of inflation or economic downturn, it can help maintain purchasing power and support economic activities. This approach is in line with broader fiscal policy objectives in achieving economic stability and growth
• Alignment with Islamic principles: A critical conclusion is that fiscal policy, including the use of zakat, should be aligned with Islamic principles. This paper argues that ideological orientation is essential for the effective implementation of fiscal policy in the Islamic context. This means that zakat should not only be seen as a financial resource but also as a means to fulfill social and ethical obligations within the framework of Islamic teachings
• The need for a comprehensive strategy: The findings show that there is a need for a comprehensive strategy to maximize the use of zakat. This includes improving collection and distribution mechanisms to ensure that zakat reaches those in need effectively and contributes to economic stability and growth.

The implementation of the imposition of zakat as a tax incentive in Indonesia has the following objectives: empowering the people’s economy, increasing Islamic financial literacy, and supporting poverty alleviation programs.

Effectiveness: In some regions, zakat management has proven to be successful in improving the welfare of the poor by utilizing zakat funds for education, health, and micro business empowerment.

d. Fiscal Incentives and Zakat in Malaysia

Zakat can be claimed as a tax deduction if paid to a registered institution, promoting charitable giving while supporting the government’s revenue needs (Ridwan M, 2016).

Based on the study of Ridwan M (2016), the following conclusions can be drawn:

• Zakat and taxes as a double obligation: This paper concludes that both zakat and taxes are important financial obligations for Muslims. Zakat is a religious obligation, while taxes are a civic responsibility. Understanding this duality is essential for Muslims living in countries with tax systems
• Different approaches in Muslim countries: The relationship between zakat and taxes varies significantly in Muslim-majority countries. For example, in Saudi Arabia, if a Muslim pays zakat, they are not required to pay taxes. This reflects a unique approach in which zakat is seen as a sufficient contribution to the country’s revenue.
• Zakat as a tax deduction in Malaysia: This study highlights that the payment of zakat can reduce the amount of tax payable. This system encourages Muslims to fulfill their zakat obligations while supporting the government’s revenue needs. This shows how integrating zakat into the tax system can benefit both individuals and countries
• Tax deduction system in Indonesia: This study notes that Indonesia has implemented a tax deduction system where the payment of zakat can reduce taxable income. This approach aims to promote zakat payments while also addressing the challenges of state tax revenues
• Historical context of zakat and taxes: this study discusses the historical evolution of zakat and taxes in Islam, showing that zakat was originally the main source of state revenue. Over time, as the country’s needs increased, taxes were introduced as an additional obligation for citizens, especially for non-Muslims
• The importance of regulation and management: Effective regulation and management of zakat and taxes is essential to maximize its benefits. The review emphasizes that clear laws and systems can improve compliance and ensure that zakat and tax revenues are used effectively for the public welfare
• Overall integration for better outcomes: This study concludes that integrating zakat and the tax system can lead to better financial outcomes for the country and its citizens. By recognizing the importance of zakat along with taxes, the government can create a fairer and more effective financial system.

Malaysia has a more advanced system in integrating zakat with fiscal incentives because the management of zakat has been carried out in a structured manner through the state system.

The Malaysian government has a policy related to zakat, that

1. Zakat as a tax credit, with the following conditions:

• The zakat paid is recognized as a direct deduction of the amount of tax payable (tax credit), not only as a deduction of taxable income as in Indonesia.
• This provides greater incentives for Muslim taxpayers to pay zakat.

2. Zakat authority in each state. The Malaysian government has a State Islamic Religious Council (MAIN) which is responsible for administering zakat at the state level, providing flexibility and efficiency.

3. Promotion of zakat through digitalization. Malaysia is integrating zakat payments through digital technology, such as mobile applications, to improve public compliance.

The effectiveness of the implementation of the imposition of zakat as a fiscal incentive in Malaysia can be successful  in relation to optimizing zakat funds to be used for community economic development, such as education financing and small business development.  As well as the combination of zakat and fiscal incentives strengthens the relationship between fiscal policy and Islamic values.

e. Fiscal Incentives and Zakat in the Kingdom of Saudi Arabia

As the center of the Islamic world, Saudi Arabia places zakat as one of the main fiscal instruments. This country does not collect income tax from its citizens, so zakat is the main source of wealth redistribution.

Zakat is mandatory, and citizens are exempt from income tax if they fulfill their zakat obligations. This creates a unique fiscal environment where zakat functions as the main source of social welfare funding (Ridwan, 2016).

The research of Ridwan M (2016) analyzes the relationship between zakat and taxes in Muslim-majority countries. The results show significant differences, such as in Saudi Arabia, where zakat is considered a sufficient contribution to the country’s revenue, replacing the tax obligation.Zakat Related Policies:

1. General Authority for Zakat and Taxes (GAZT)

• GAZT is responsible for managing zakat, ensuring transparency, and distributing it to those in need.
• Companies are also required to pay zakat on their business profits.

2. Focus on zakat resources for social development. Zakat is used for poverty alleviation programs, community development, and economic empowerment.

3. Foreign company tax reduction. Foreign companies operating in Saudi Arabia can take advantage of this fiscal policy as a form of incentive to invest more in the country.

Effectiveness in Saudi Arabia:

• In the Saudi context, zakat serves as the main instrument of economic redistribution and poverty alleviation because the country does not have a direct taxation system like Indonesia and Malaysia.
• The role of zakat is more dominant because of the strong religious values of the community.

Ahmed Altawyan (2022), conducted a study on “Subjecting Net Profit to Zakāt in Saudi Law”, in his research concluded that:

• There is an urgent need for clearer legal guidelines on the treatment of adjusted annual net income in relation to zakat. The current legal ambiguity creates confusion among taxpayers, which can lead to inconsistent practices in the calculation and payment of zakat.
• Emphasizing the influence of Sharia fatwa on zakat obligations. Fatwa stating that zakat is not mandatory on money spent on buying assets until one year has passed plays an important role in shaping taxpayer behavior. This shows that religious interpretation significantly impacts legal practices and taxpayer decisions
• Taxpayers prefer to reduce assets from their zakat base, which suggests a strategic approach to minimize their zakat liabilities. This behavior reflects a broader trend in which taxpayers seek to align their financial practices with legal and religious expectations.
• Integrating religious viewpoints with legal and accounting perspectives is essential to develop a comprehensive framework for zakat. This integration can help ensure that zakat practices are in line with Islamic principles and practical for taxpayers, ultimately promoting a more effective zakat system in Saudi Arabia.

Broadly speaking, the study underscores the need for legal clarity, the impact of religious interpretation, and the importance of taxpayer behavior in shaping zakat practices in Saudi Arabia. The proposed improvements aim to create a more favorable environment for legal compliance.

Comparison and Analysis of the Imposition of Zakat as a Fiscal Incentive

A comparative analysis of the imposition of zakat as a fiscal incentive in Indonesia, Malaysia and Saudi Arabia can be summarized in this table:

Table 1. Comparison and Analysis of the Imposition of Zakat as a Fiscal Incentive

Economic Impact

Economic analysis shows that zakat has great potential as a fiscal instrument in Indonesia, with an estimate of Rp100 trillion (Ibrahim, 2011). The effective implementation of zakat can increase economic stability, align with Islamic values, and support economic growth.

1) Indonesia

Impact of Zakat:

a. Wealth Redistribution:

The implementation of zakat in Indonesia has a significant impact on the welfare of the poor. BAZNAS noted that zakat improves welfare through the provision of business capital, skills training and consumption assistance, thereby supporting social and economic development.

b. Contribution to Poverty Reduction:

Research shows that zakat is effective in reducing poverty levels. According to BAZNAS, in 2022, the potential for zakat will reach IDR 300 trillion, but the realization is still limited because payment compliance is not optimal.

c. Relationship with Taxes:

Zakat can be used as a tax deductible, thus encouraging zakat obligors to fulfill their obligations.

Tax Impact

a. State Revenue:

Taxes are a strategic fiscal instrument that supports state revenues and fiscal stability. Taxes are used to finance various public sectors such as infrastructure, education, health and social programs, so they play an important role in supporting the state budget and national development.

b. Economic Load:

For the community, taxes can be an economic burden, especially if the imposition of taxes is unfair or there is a leakage in its management.

c. Fiscal Justice:

The use of zakat as a tax incentive is an effective strategy to integrate the sharia economy into the fiscal system, strengthen the balance between religious and state obligations, and support economic development based on Islamic values.

2) Malaysia

Impact of Zakat

a. Poverty Alleviation:

Effective zakat management by official institutions such as PPZ shows a significant contribution to the improvement of the human development index among Muslim communities, through the provision of direct assistance, education and small business development.

b. Tax Incentives:

Zakat in Malaysia can fully reduce individual and corporate income tax (tax rebate), thereby increasing mandatory zakat compliance and supporting income redistribution.

c. Social Effects:

Zakat creates social stability by reducing the gap between rich and poor groups.

Tax Impact

a. State Revenue Sources:

• Taxes in Malaysia play a major role in supporting national development, including the education, health, and infrastructure sectors.
• Income Tax and Goods and Services Tax (GST, formerly SST) create a stable source of income.

b. Economic Competitiveness:

Competitive tax rates and tax incentives for foreign investors help attract capital inflows, thereby boosting economic growth.

c. Fiscal Efficiency:

An integrated system between zakat and taxes allows the state to better manage its finances, without reducing the religious obligations of the community.

3) Arab Saudi

Impact of Zakat

1. Social Focus:
   • Zakat is levied at 2.5% of the working capital of Saudi individuals and companies, which is allocated to help the poor through the Zakat, Tax, and Customs Authority (ZATCA).
   • Zakat supports social stability and helps close economic gaps without affecting the formal tax structure.
2. Light Fiscal Burden for Local Companies:
   • Saudi companies are only required to pay zakat, which is lower than income tax. This supports the competitiveness of local companies.
3. Trust Effect:
   • Because zakat is a sharia obligation, the level of compliance of Saudi people and companies is higher than taxes.

Tax Impact

a. Economic Diversification:

• Taxes such as VAT and corporate income tax on foreign companies help Saudi Arabia reduce its dependence on oil revenues.
• Tax reform supports the implementation of Saudi Vision 2030, which is to diversify the economy into non-oil sectors.

b. Fiscal Balance:

Taxes are a new source of revenue to cover the budget deficit due to fluctuations in oil prices.

c. Social Challenges:

• The imposition of new taxes, such as VAT, has caused resistance from the public because it increases the price of goods and services, thus affecting domestic consumption.

Table 2. Comparison of Economic Impacts in the Three Countries

CONCLUSIONS

Conclusion

Tax incentive policies in Indonesia require reforms to increase investment competitiveness. The integration of zakat with the tax system, such as in Indonesia, Malaysia and Saudi Arabia, offers a sustainable and inclusive model of sharia economic development.

A comparative analysis between Indonesia, Malaysia and Saudi Arabia reveals that zakat as a fiscal incentive has a significant impact in promoting social justice and a sustainable economy, with different integration approaches.

1. Wealth Redistribution

Zakat functions as an instrument to reduce socio-economic disparities through the redistribution of wealth from the rich to the needy. This effect is even more optimal when managed professionally and transparently.

2. Tax Burden Reduction

In Indonesia, Malaysia and the Kingdom of Saudi Arabia, the recognition of zakat as a tax deduction (either deductible expense or tax credit) is an incentive that encourages public awareness to fulfill sharia obligations while fulfilling tax obligations.

3. Strengthening the Ummah’s Economy

The use of zakat for community empowerment, such as education financing, micro business capital, and poverty alleviation programs, helps create an economically independent society, thus having a positive impact on overall economic growth.

4. System Effectiveness

The success of the implementation of zakat as a fiscal incentive is greatly influenced by the quality of management, supervision, and accountability of zakat institutions. Decentralized systems such as those in Malaysia and Saudi Arabia allow for more flexible management, while in Indonesia, centralized systems through BAZNAS face bureaucratic challenges

The integration of sharia principles with technology and modern fiscal policy innovations can make zakat a solution to achieve an inclusive and sustainable economy.

Suggestion

The following is a summary and recommendations to maximize the effectiveness of zakat as a fiscal incentive:

Strategic Recommendations:

1. Digitization and Data Integration: Strengthen the digital system to facilitate zakat payments and integrate data with the tax system.
2. Capacity Building of Zakat Institutions: Train zakat managers and strengthen distribution supervision.
3. Collaboration with the Private Sector: Involve the private sector in productive zakat and CSR programs.
4. Education and Socialization: Increase public literacy about zakat and its benefits.
5. Development of Inclusive Fiscal Policy: Consider the tax credit mechanism and expand the use of zakat for strategic sectors.
6. Increased Transparency and Reporting: Create a public zakat distribution report and build an independent audit system.

Benefit:

1. Increase the efficiency and transparency of zakat management.
2. Encouraging inclusive economic growth.
3. Increase tax compliance and public awareness.
4. Strengthening public trust in the government and zakat institutions.
5. Helping to achieve the sustainable development goals (SDGs).

Direct Action

1. Create an action plan for the implementation of digitalization and data integration.
2. Determine training standards for zakat managers.
3. Establish cooperation with the private sector.
4. Create an education and socialization strategy.
5. Evaluation of fiscal policies related to zakat.

By implementing these measures, the government and related institutions can maximize the potential of zakat as a fiscal incentive and encourage inclusive and sustainable economic development.

ACKNOWLEDGMENT

We would like to express our infinite gratitude to the parties who have taken part in preparing this paper, so that it can be published in this journal.

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