Indonesia urged to treat zakat as tax credit for fairer welfare reform

Indonesia should consider elevating the status of zakat, the mandatory Islamic alms, from a mere deduction from gross income to a direct tax credit against income tax. This proposal, outlined by economist Jaharuddin of Universitas Muhammadiyah Jakarta, argues that such a policy would acknowledge that a portion of citizens' economic capacity is already allocated to legitimate, measurable social objectives, aligning with the state's constitutional duty to promote general welfare.

The current system, governed by regulations like PMK Nomor 114 Tahun 2025 and PER-4/PJ/2026, allows zakat on income to be deducted from gross income. Payments must be made to government-sanctioned bodies. This reflects a principle that socio-religious obligations can be considered in the tax system, but the current recognition may not be sufficiently fair or effective. The deduction offers a relatively small benefit, as it only reduces the tax base, with the actual tax saving dependent on an individual's marginal tax rate.

For example, a 15% tax rate on a Rp10 million zakat payment would result in a tax saving of only about Rp1.5 million. This limited fiscal recognition contributes to a perception of a "double burden" for those paying zakat. A tax credit system, however, would offer a more direct and transparent benefit. If someone owes Rp12 million in tax and has a Rp5 million zakat payment, their remaining tax liability would be Rp7 million.

This tax credit should be non-refundable, meaning it wouldn't result in a refund if the zakat exceeds the tax owed. It could also be capped as a percentage of tax or implemented gradually, requiring verifiable payments. Economically, this policy could enhance welfare through multiple channels. A stronger incentive would encourage more zakat payments through official institutions, potentially channeling funds more effectively for social development.