The only reason behind importance of Zakat is that it is an important pillar of Islam. Different scholars may have different definitions of Zakat but in simple words, “Zakat is Purification of money”. Zakat is due after 1 year of keeping asset. These assets include everything excess from your needs.
Zakat is totally different from Tax as tax is imposed by National Govt but Zakat is part of belief in Islam. Zakat Tax difference is also observed that Zakat is for deserving people and must be delivered by the one who is deducting it but Tax is paid to Govt and they utilize the amount as they want to.
Importance of Zakat for Wealth Production
Higher Liquid Assets
Zakat discourages hoarding and people can make use of their liquid assets to promote saving, investment and capital formation in the country .They invest in various sectors of the economy as a result aggregate production in the economy goes up.
Higher Velocity of Circulation of Money
Zakat promotes velocity of circulation of money due to which aggregate demand for goods and services increases. It increases the level of investment , income and employment
Higher Capital Formation
Zakat is paid on saving which remains accumulated for at least one year. Therefore it brings down the absolute amount of saving with a person .to maintain his consumption standard, he gets stimulus to increase the level of saving . hence , marginal saving goes up which can be used to make additions to the existing capital stock of the country. This will certainly promote production level in the economy.
Since, Zakat increase the aggregate demand for consumer goods, consumption function of the community in a macro sense may shift upward. the economy would become more efficient.
Importance of Zakat for Distribution of Wealth
Automatic and Fair Distribution
Since 2.5% of the wealth of rich is transferred to the poor every year in the form of Zakat .It means, whole wealth of the rich is transferred to the poor section of the community in the forty years. This provides an automatic mechanism for the flow of wealth from the rich to the poor, due to which wealth is fairly distributed among different sections of the society.
Better Allocation of Resources
Transfer of money from the rich to the poor in the form of Zakat would mean that demand for basic necessities of life will increase. This will encourage their production. Scarce resources would be drifted away from production of luxuries to that of necessities .This is better allocation and distribution of scarce resources.
The construction of social welfare institutes with the Zakat fund ensures distributive justice in the economy.
Better Living Standard
Zakat provides the better quality of life to poor through the process of re-distribution of income.
Wider Circulation of Wealth
Zakat curtails the ratio of wealth concentration in a few hands.