Policy and Compliance Issues of Tax System for Shariah Equities, Islamic Finance and Zakat Reporting in Malaysia

Abstract

The development of Shariah equities and Islamic finance requires effective and distinct policy and guidelines of the tax system. There are more than 600 Islamic financial institutions across 75 countries globally. The proliferation of Islamic financial institutions in new jurisdictions across the globe is clear evidence of the rapid internationalization of Islamic finance. Malaysia is known as a global leader for Islamic capital market. The Capital Market Master Plan 2 (CMP2) launched by Securities Commission Malaysia in April 2011 has emphasized on the strategy for promoting the internalization of Islamic finance. Thus, there is a need for a specific tax system for the Islamic capital market and finance in Malaysia. This study reviewed the current tax system for Shariah equities and Islamic finance and examined the reporting of zakat among Shariah-compliant companies in Malaysia. The study found that the tax legislations have provided several tax provisions to promote Islamic finance. However, there is no specific tax system to cater Shariah equities and Islamic finance. In other words, the conventional tax system is also applicable to the Islamic finance transactions. The study also revealed that only 15 Shariah-compliant companies had disclosed zakat in the annual reports during the years 2009 to 2012. This study concluded that the development of Shariah equities and Islamic finance requires policymakers, practitioners and zakat scholars to look into clear standards and policies of the tax system for future growth of the Islamic capital market and further enhance the Shariah compliance level of the Shariah-compliant companies.