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Wed, Jan 31, 2007
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Taxation & Development
Banking Reforms

Taxation & Development
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Taxation serves as a tool for economic development and growth. According to Moj News Agency, people worldwide have come to the conclusion that they have to pay taxes for the services they receive.
Taxes consist of direct or indirect taxes paid in the form of money. In modern, capitalist taxation systems, taxes are levied in money, while in-kind and labor taxation are characteristics of traditional or pre-capitalist states and their functional equivalents.
The means of taxation and the uses to which the funds raised through taxation should be put are a matter of hot dispute, hence discussions regarding taxation are often tendentious.
In many nations, those who pay tax are the ones that can be considered citizens.
The majority of taxpayers agree on why they must pay taxes and are sensitive toward state incompetence or wastage of financial resources. They are, however, unhappy over unprincipled and high taxation.

Islamic Law
Taxes in the Islamic law come in the form of Khums (one-fifth of savings) and Zakat (tithe). Islamic governments collect them and spend them on improving public services, speeding up economic development and enhancing national defense.
In fact, the expenditures of an Islamic government are secured through these two forms of taxes, and other forms of taxes deemed necessary. Imam Ali (AS) has said there will be no government without a tax system in place, but he added that it cannot be collected by force either.
Incidentally, the first person to pay direct tax in Islam was Imam Ali (AS).
Zakat is one of the obligations of Islam and refers to spending a fixed portion of one’s wealth for the poor or needy, including people whose hearts need to be reconciled, slaves, those in debt, those in the way of God and travelers.
The basis of Zakat is given in the Holy Qur’an: “Of their goods take alms, so thou might purify and sanctify them; and pray on their behalf, verily thy prayers are a source of security for them.“ (9:103)
A Muslim may also donate an additional amount as an act of voluntary charity, in order to achieve divine reward.
There are two main types of Zakat: Zakat on traffic and Zakat on wealth.
Zakat on traffic (Zakat-ul-fitr) is a per head payment equivalent to the price of around 2.25 kilograms of the main food of the region (this may be wheat, dates or rice, depending on the place) paid during the fasting month of Ramadan by the head of a family for him/herself and his/her dependents to the Zakat collector.
Zakat on wealth (Zakat-ul-mal) comprises all other types of Zakat, such as on business, crops, livestock, minerals unearthed, etc. The payment of Zakat is obligatory on all Muslims.
According to the Shiite interpretation also, which is based on the Holy Qur’an and the authentic statements and actions of Prophet Muhammad (PBUH) and his Infallible Household (AS), there are two main forms of taxes: Khums and Zakat. The Shiite consider both types to be a personal obligation, meaning that every Muslim has the full responsibility of purifying his own money, but the government should not force any individual to pay Zakat or Khums.
Khums is taken from war booty, gold/silver coins, treasures, diving for pearls, savings and so on.
In modern days, the most common type of Khums extracted is of the last type. Khums on savings is paid by taking one-fifth of the increase in income saved after one lunar year, and this is done after paying debts and bills.
Zakat, on the other hand, according to the Shiite teachings, is assigned to specific goods. There are nine types of goods from which Zakat is paid out: gold, silver, camels, cows, sheep, wheat, barley, dates and raisins. Each type has its own ’Nisab,’ or a quota which makes payment of Zakat mandatory.
In both cases, they are obligatory on the individual and cannot be forcibly taken by the government.

Social Justice
In the Islamic system, the chief aim behind tax collection is to help the government efficiently run the Islamic society, meet the needs of the needy, help the region develop and boost its national defense capacity.
Also, taxation is best mechanism for enforcing social justice by transferring wealth from the rich to the low-income strata. In fact, no other mechanism other than tax can help develop the national economy or administer social justice in a sustained manner. This explains why many candidates during election campaigns talk about taxing less for implementing their future programs, undertaking fair distribution of wealth and administrating justice.
With regard to the relation between state taxes, Khums and Zakat, it must be noted that state taxes play a specific role in giving a government the means to meet a particular need.
State taxes are independent of other payments such as Zakat and Khums. They differ in each and every country and it is wrong to conclude that they must be similar for everywhere.
On the whole, taxation help administer a nation, such that people enjoy the benefits of health, safety and prosperity.

Gov’t Role
Given the importance of taxation, the government should pave the way for colleting taxes, as there will be no public facilities without the budget resources. Governments failing to collect taxes in an efficient manner, particularly when they have no other source of income, are unlikely to survive.
The government can only ensure cultural, economic and public welfare, socioeconomic justice, security, independence and territorial integrity with the help of taxes.
Also, the government should have the capacity and the means to provide these facilities at all levels. This will largely depend on how the government secures the resources for its annual budget.
Securing the budget has its own legal ways and strategies, and fair governments are the ones that secure their financial resources through equitable means.
Taxation has been introduced to help secure the necessary finances for the governments, but in an Islamic country the type and amount of tax should comply with the precepts outlined by the Holy Qur’an and the teachings of Prophet Muhammad (PBUH) and his Infallible Household (AS). In other words, taxation should be fair and not oppress taxpayers.
In Islam, paying taxes were viewed as undertaking jihad, which means defending the country against enemy aggressions--one of the most admirable of acts. However, people are free to contribute as much as they can afford without any obligation.
The difference between Islamic taxes and non-Islamic financial responsibilities is: The basis for tax and its amount depends largely on the government’s requirements. The Holy Qur’an only reminds people that it is a duty to support a legitimate government meets its legitimate requirements by paying taxes, allowing the circumstances to shape the taxation mechanism and volume. The Islamic government ensures that the wealthy pay more and nobody is burdened by taxes.
Ultimately, all strata will willingly pay their share of tax when they see its financial transparency, fairness and benefits.

Banking Reforms
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The working group for modern services and cash cards will be managed by Bank Saman, with the banks of Sepah, Karafarin and Saderat as members.
Currently the banking sector is seeking to reform Islamic banking, electronic banking, banking rules and regulations, financial transparency, supervision and inspection, presence in world markets, productivity, privatization, foreign exchange deals and credit facilities.
Seyyed Hamid Pour-Mohammadi, deputy economy minister for banking affairs, told Fars News Agency that banking reforms are underway and the Ministry of Finance and Economic Affairs has set up working groups for the purpose.
Under a directive ratified by the government regarding banking reforms, an MoU was signed by the ministers of economy and information and communication technology to form the Electronic Banking Committee.
According to the official, the committee members include representatives of private banks, the Central Bank of Iran, Ministry of Information and Communication Technology, Commerce Ministry, Iran Chamber of Commerce, Industries and Mines, as well as economic experts. The committee has been set up within the Ministry of Finance and Economic Affairs.
The chief aim of the committee is to devise and implement multilateral measures that need to be taken for promoting electronic banking across the nation in line with the required standards and the prevailing indices and rules.

Working Groups
Pour-Mohammadi said that in addition to the main working group related to electronic banking, five other working groups are also active. These working groups are dealing with infrastructure, network security and telecommunication lines, standardization, payment system, core banking and cash card services.
The working group in charge of promoting the use of electronic banking services and facilities will be handled by Bank Tejarat. Its members include the banks of Keshavarzi, Sepah, Saman and Parsian. They will be responsible for promoting the culture of electronic banking among bank personnel and the general public nationwide.
According to the official, the electronic banking scheme should be implemented by the end of the Fourth Five-Year Economic Development Plan (2005-2010). To this end, 400 new ATM and 1,000 ADSL telecom lines will have to be set up for the purpose.
For instance, the working group dealing with network security and infrastructure is responsible for providing the infrastructure of electronic banking and also ensuring the security of telecommunication networks.
Bank Mellat is in charge of the infrastructure working group as well as network security, with banks of Eqtesad-e Novin, Tejarat, Melli, Sepah, and Industry and Mine as members.
The working group of telecommunication security will set up security management system of SLA network next year. The group will be responsible for reducing communication failures, boosting network security, linking communications between banks and telecom companies, and also offering contingency services round the clock.
The main aim of the working group is to increase the security of telecommunication network for ensuring the smooth running of electronic banking.
The deputy economy minister noted that banks have 13 separate programs to boost the security of their own telecom networks and data, adding that the Ministry of Information and Communication Technology’s top priority is to increase the number of telecom landlines to avoid satellite communication glitches and other risks.
The activities of the working group dealing with standardization and payment system will be handled by Bank Melli and Bank Kesharvarzi. Other members of the group include the banks of Maskan, Refah and Parsian.
To develop core banking, three phases have been designed: identifying the needs based on existing data, undertaking evaluation and implementing the quantitative objectives of banks in line with the Islamic banking system.
According to Pour-Mohammadi, the implementation of core banking is high on the agenda of all banks, for which the ministry has ratified and notified directives to the banks.
As per the directives, banks are required to implement the core banking initiative within the next three years.
The working group for modern services and cash cards will be managed by Bank Saman, with the banks of Sepah, Karafarin and Saderat as members. The group plans to have 870,000 POS, 75 million cash cards and 30,000 ATMs by the end of Fourth Plan.
The working group for training affairs will be handled by Bank Keshavarzi as well as representatives from the banks of Tejarat and Parsian. Their programs will focus on training the banking staff and organizing periodical training working groups across the nation.
The success of working groups will dramatically transform Iran’s banking sector.