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.


Standard Chartered Plans `Big Push' on Shariah Contracts: Islamic Finance

Standard Chartered Plc, the U.K. bank that earns most of its profit from emerging markets, plans to introduce Shariah-compliant contracts in Asia to hedge against changes in commodity prices.

The products, which the London-based bank made available in the Persian Gulf in March, will allow buyers and sellers to agree on fixed or floating prices and make it easier for companies to protect themselves from volatility in goods such as sugar, rice, wheat and crude oil, Afaq Khan, chief executive officer of Standard Chartered’s Islamic banking unit in Dubai, said in an interview on Aug. 9.

Afaq Khan, chief executive officer of Standard Chartered Plc's Islamic banking unit.

“This year the big push is on commodity derivatives,” he said. “We will certainly be offering them in countries like Malaysia and Indonesia in due course. When there is sufficient demand we will go to the central banks to seek approval.”

Asia accounted for 68 percent of the total $7.8 billion of sukuk, or Islamic bonds, sold worldwide this year, according to data compiled by Bloomberg. Economic growth in developing Asia, including Malaysia and Indonesia, will accelerate to 9.2 percent in 2010 from 6.9 percent in 2009, according to estimates by the International Monetary Fund on July 7. Expansion in the Middle East was forecast at 4.5 percent, compared with 2.4 percent last year. Continue reading