Q: What is the ruling on tax in Islam; specifically, employment tax? If I have a job where I am given cash in hand, so that the company can avoid tax, would I also be liable for escaping tax? Alternatively if I am hired privately to do a one off job, for example to paint somebody’s room, and we agree a fee for the job, would I then have to go to the tax department and tell them? My concern is that the UK government uses tax money for all kinds of uses.
الجواب حامدا ومصليا ومسلما ومنه الصدق والصواب
A: In Islam there are several sources of state revenue which include, Zakat, Ushr (agricultural produce), Kharaj (land tax), tax on mines, treasure troves, and estates of deceased persons (in some circumstances). Such sources do not originally include income tax or sales tax. There are several reliable traditions which prohibit the levying of tax and so scholars have traditionally not allowed the imposition of income tax. However, if the legitimate sources of state revenue are insufficient to meet the needs of the state then can the state impose additional taxes? Some contemporary scholars maintain that the state cannot impose additional taxes as, despite the need, there is no precedent of the Messenger of Allah sws or his companions ever doing so. Other scholars maintain that, given the needs of modern economies the state may impose additional taxes provided:
- The tax is levied only to meet legitimate need and is used correctly.
- The tax levy is not more than the actual need.
- It does not overburden the masses.
- The administration of the tax is simple does not create difficulty and complications for the masses.
When living as a minority in a non-Muslim majority country, such as the UK, there are two basic opinions amongst those scholars who allow the imposition of tax to meet genuine need:
- As a citizen/resident of this country one has a covenant with the state to pay all taxes as are imposed by the state. Therefore, one should honour the covenant and pay any tax in full irrespective as to how the tax revenues are employed.
- The rate of tax imposed by the state is excessive or/and is imposed to meet avenues of expenditure that do not pass the test of legitimate need. Therefore, although some level of tax is payable, the full tax figure being demanded is not payable. Essentially, the excess being demanded is a form of oppression and one has the right to protect one’s property from oppression. How much is then payable is a grey area.
The safer option, in my view, is to utilise existing tax planning structures to minimise the payment of what is deemed as the excess.
It is entirely legitimate for you to be paid cash-in-hand. If your employer does not declare the whole amount you are paid then that is the responsibility of your employer. Whilst it may be praiseworthy for you to encourage your employer to declare in full, the responsibility to do so lies with your employer. However, the declaration of any earnings that you have accrued is subject to the rule mentioned above. Some scholars are of the opinion that you should declare in full whilst others opine that you do not have to do so. In my view, it is evidently safer for you to use existing tax planning structures with which you can minimise your tax liability.