Tax neutrality for Islamic finance contracts

A critical factor in the development of the Islamic financial services industry is taxation framework, highlights ‘Islamic Finance: Writings of V. Sundararajan,’ edited by Jaseem Ahmed and Harinder S. Kohli ( Such a framework should ensure tax neutrality, so that Islamic finance contracts incur the same level of taxation as the equivalent conventional counterparts, the author argues.

He cautions that the Islamic finance contracts, which often involve multiple transactions and additional parties compared to conventional instruments, are likely to attract higher taxation in many tax systems, and can thus impose higher costs on Islamic finance. “For example, in some countries, Islamic asset-based financing contracts are treated as purchase and resale of assets, and hence such financing is taxed twice.”

Thankfully, however, in some countries such as the UK and Singapore, the double stamp duty on a few Islamic modes of finance has been abolished, so as to provide tax neutrality, the author observes. “Malaysia has also issued legislation providing stamp duty exemptions for additional instruments in Shari’ah-compliant financing schemes, deductions for expenditure incurred on them, and in issuing Islamic securities, and tax exemptions on the resulting assets and profits similar to the treatment of interest cost or earnings from conventional securities.”

The book recounts that in 2007 the UK Treasury introduced legislation to enable banks to sell sukuks (bonds), allow sukuk issuers to offset the payments as tax deductible expenditure (as in the case of conventional interest expenditure), harmonise and clarify the tax treatment of SPVs (special purpose vehicles) used for issuing sukuks, and clarify the tax treatment of diminishing musharaka transactions for capital gains purposes.

Erudite compilation of immense value.