Islam introduced the system of zakat, which is a 2.5% annual tax on wealth that is held in the form of gold, silver, currency or other assets for a period of more than a year. The proceeds of this tax are used to promote welfare of the poor. Thus, if a person has forty rupees in his possession and he keeps the money for the entire year, he must pay one rupee as zakat to the government.
It should be noted that this is not an income tax on earnings. Instead, zakat is payable on accumulated wealth and is spent for the welfare of the poor. Zakat is due on all kinds of wealth, whether coins, animals, produce, jewellery or other tradable assets. However, jewellery that women use normally, and especially if they also occasionally share it with less fortunate women, is exempt from zakat. According to Islamic scholars, if jewellery is used only for personal use and is not shared with poor women, zakat should preferably be paid for it. In any event, Islam strictly mandates that zakat be paid on those pieces of jewellery that are not in common use.
Zakat is payable every year as long as the wealth in one’s possession does not fall below the taxable minimum. Zakat is paid not only on capital but also on the accumulated profit that it fetches. The moral basis of zakat is that if anyone, despite all the provisions against excessive accumulation of wealth, still manages to accumulate money, the Islamic government will tax a portion of it every year, on grounds that, because of their hard work, the poor have a right and a share in the wealth accumulated by the rich. Therefore, a system has been put in place to take away the due right of the poor from the rich every year.