South Africa to change tax and boost Islamic banking

South Africa is proposing amendments to the Income Tax Act to level the playing field between Islamic banks and conventional banking, although no date has been set for their implementation.
Business Day newspaper ( quotes Amman Muhammad, MD for Absa Islamic Banking saying the new laws are to encourage foreign direct investment into SA. He says current tax laws prejudice Islamic finance and undermine SA’s financial role in non-western markets as a regional financial centre.
Countries such as UK, France and Hong Kong have changed their tax laws to make them compliant with Sharia law. In South Africa in 2004 and 2005 First National Bank and Absa introduced Sharia banking. Albaraka Bank and the Islamic Bank were the first Islamic banks to be granted a licence by the SA Reserve Bank (1980s) but the Islamic Bank was liquidated in the late 1990s due to allegations of reckless trading.
There are about 500 million Muslims in Africa, including just over 1 million South Africans (2% of the population).
According to the news report, Islamic finance forbids the paying and receiving of interest (riba), including investing in certain industries. Sharia law says interest-bearing transactions result in economic ills, such as unemployment and high inflation. Trading in derivatives and speculative investment also is forbidden, as Sharia law requires that all transactions be backed by tangible assets.
Mr Muhammad says the proposed laws could increase the tax base and bolster the country’s gross domestic product (GDP). The Banking Association of SA estimates that the “unbanked” in SA have put about R12bn (US$1.7 billion) “under mattresses”. The new laws could have a great effect if some of that money came back into that market, says Mr Muhammad. He believes many Muslims, due to the restrictions on Islamic banking, have had to keep their money at home.
The proposed amendments to the Income Tax Act take into account 3 different types of Islamic financing on which one can develop products.
1. Mudurabah, a form of deposit where the client invests with a bank and, the bank invests deposits in Sharia-compliant enterprises or products.
2. Murabaha, which is a mark-up financing transaction offered by a bank so that a client can obtain financing for various assets, such as property and equipment.
3. Diminishing musharaka, a partnership arrangement usually used for project financing.
Wouter Scholtz, a director for tax at audit, tax and advisory firm Mazars, told the Business Day, that the proposed tax laws adopt the principle of “substance over form” as the basis for the analysis and regulation of Sharia-based financial transactions. In terms of this, for tax purposes an amount will be taken to be interest if it replaces interest under conventional transactions. He acknowledged that the treatment of such a transaction might be construed as offensive, but it should be appreciated that if the amounts in question were not to be treated as interest, the client might be deprived of the right to claim a tax deduction, Mr Scholtz points out. Emil Brincker, a tax director at commercial law firm Cliffe Dekker Hofmeyr, says in Islamic law the time value of money is not recognised. It regards money as a measuring tool for value and not an asset, he says.
Mr Muhammad also hopes that the Government will issue a sovereign sukuk (Islamic bond), which has been done in some other African countries.


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