The possibility of applying zakat as an alternative to income tax on companies in Libya " Analytical study"

Abstract

The study aimed to examine the feasibility of implementing Zakat as a substitute for corporate income tax in Libya by conducting a comparative analytical study between the financial obligation of income tax and the amount of Zakat. This study employed an analytical approach by analyzing the financial statements of several companies, calculating taxable income based on both accounting and tax principles, and subsequently determining the Zakat base and the Zakat due on that income. Additionally, the study utilized a comparative approach to compare Zakat with income tax for each of the companies under study. The results revealed preliminary indications regarding the feasibility of implementing Zakat as a substitute for corporate income tax in Libya. Furthermore, the findings suggest that replacing income tax with Zakat—based on the data analyzed—would not necessarily lead to a decline in public revenues. The comparison also demonstrated that Zakat proceeds exceeded tax revenues across the aggregate of the companies studied. Furthermore, the study revealed variations between income tax and Zakat obligations from one company to another, attributable to the differing bases used to calculate each. Additionally, it was found that incurring a loss does not necessarily exempt a company from Zakat liability; a Zakat obligation may arise even in the absence of taxable income (i.e., in the event of a loss). Separately, the study indicated signs of inaccuracy in the financial statements submitted by certain companies, a situation that could create opportunities for tax evasion. This prompted the tax authority to reassess taxable income in accordance with its established procedures. In this context, the study noted that implementing Zakat as a substitute for income tax—given its nature as an act of worship between the individual and God—could be a viable option for curbing tax evasion. The study concluded that the feasibility of implementing Zakat as a substitute for corporate income tax in Libya warrants further specialized study, as there are preliminary indicators supporting this.