Indonesian Agency Pushes for Zakat to Be Direct Tax Offset

The National Amil Zakat Agency (Baznas) of Indonesia is actively pushing for a policy shift that would allow zakat (obligatory charity) payments made through official institutions to be directly deductible from taxes, akin to a tax credit or rebate. This initiative, discussed at a Philanthropy Journalism Focus Group Discussion, aims to significantly increase public engagement with formal zakat channels and bolster state revenue.

Rizaludin Kurniawan, a leader at Baznas, explained that the aspiration comes from numerous individual and corporate donors. Currently, zakat paid through Baznas or other official zakat bodies only serves as a tax deduction, reducing an individual's taxable income. "Currently, the zakat paid is only a tax deduction, it only reduces taxable income, and it is considered quite small for the zakat payers whose numbers have increased significantly at Baznas and zakat institutions," Rizaludin stated.

Baznas has conducted studies and found that such a tax credit scheme is not unprecedented. Several countries, both Muslim-majority and non-Muslim, have implemented similar policies. Rizaludin cited Malaysia, Saudi Arabia, Sudan, Pakistan, and Bangladesh as examples of nations offering direct tax reductions for zakat. He also noted that countries like the United Kingdom, Spain, and South Korea provide similar incentives for public philanthropic donations.

"So why doesn't Indonesia also try to accommodate and compare how philanthropic funds, whether Islamic or general, disbursed by its citizens can directly reduce taxes?" Rizaludin questioned. He is confident that implementing a tax credit system will enhance compliance with paying zakat through official institutions. Currently, out of an estimated 180 million Muslims in Indonesia who are obligated to pay zakat, infaq, sedekah, and waqaf (ziswaf), only about 20 million are recorded as channeling their contributions through Baznas or formal zakat bodies. The majority, Rizaludin believes, pay directly rather than through official channels.

"But if it's through formal institutions, they will get direct tax incentives to reduce taxes, so we believe, like in other countries, zakat payers will switch to formal institutions that manage zakat, infaq, and sedekah funds," he explained. Consequently, Baznas will continue to urge the government, particularly the Ministry of Finance and President Prabowo Subianto, to review tax regulations to enable zakat to be a direct tax offset.