National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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and values of microfinance, purposes and fund management, guarantee scheme and
development program for both conventional and Islamic schemes.
Tax Regimes and Impact on Islamic Finance
The Ministry of Finance contributed to the development of Islamic finance by amending the tax
regulation and issuing Value Added Tax Act Number 42, 2009 to accommodate tax treatment
for Islamic financial transactions. Referring to this act, the government adopts a pass-through
tax treatment for Islamic finance contracts. Income Tax Act Number 36, 2008 included Islamic
businesses as one of the income tax objects. Following up on these acts, the Finance Ministry
released the Ministry of Finance Regulation Number 136/PMK.03/2011 on income tax for any
Islamic business. The regulations determine that: (i) tax for the commercial leasing based on
Ijarah contract is treated similarly as the commercial leasing without optional right and, (ii) tax
for the commercial leasing based on Ijarah muntahiyah bittamlik is treated similarly as the
commercial leasing with optional right.
Furthermore, the tax laws stipulate that any profit arising from Islamic financial contracts
becomes an object of the income tax in similar way to how interest is treated in conventional
contracts. Similarly, Ministry of Finance regulation number 137/PMK.03/2011 on income tax
for Islamic banking businesses consider Islamic bank incomes as objects of the income tax in
the same way the law of income tax applies to interest-based (conventional) contracts.
The tax laws also deals with double taxation issues arising in Islamic financial contracts.
Particularly, an asset transfer is treated as the one from the owner of asset to the buyer
(Islamic bank client) and is taxed once only. With this tax treatment, the issue of double stamp
duties is resolved in Islamic trade based financial contracts that are used in banks, nonbanks
and even financial markets.
Dispute Settlement and Conflict Resolution Framework and Institutions
Other than using the civil courts that use the laws of the countries for adjudicating disputes in
Islamic finance, disputes can also be taken to the religious court body that also deals with the
Islamic banking industry. Indonesia enacted Religion Court Act Number 3, 2006 to facilitate
dispute settlement of cases arising in Islamic financial transactions. This act gives the parties
the right to take any dispute in Islamic finance to be adjudicated either in religious court or
national civil courts. The Article 49 of the Act extends the responsibilities and authorities of the
religion court body to cover investigation, court decision and settlement of the disputes in
humanities, charities (awqaf, zakah, etc) as well as the Islamic economy. The Islamic economy
is defined broadly as activities or business operations based on Sharia (Islamic) principles, and
this includes Islamic banks, Islamic microfinance, Islamic insurance (takaful), Islamic
reinsurance, Islamic mutual funds, Sukuk and other medium to long term Islamic securities,
Islamic financing, Islamic pawnshop, Islamic pension funds and other Islamic businesses.
The mandate of the Religious Court body was legalized further in Article 55 of the Islamic
Banking Act number 21, 2008 that maintains that the court body can mediate and settle the
Islamic financial transaction disputes. However, this law also allows for settlement outside the
religious court body as long as it is agreed upon by the parties of the contract. The avenues for
resolving disputes include consensus (musyawarah) among parties through banking mediation
in the OJK, National Islamic Arbitrage Body (Basyarnas), or even in the general court.