PROPOSED ISLAMIC TAXATION TO AVOID EXCESSIVE DEBT AND FINANCIAL CRISES: CAN ISLAMIC MODEL BE A SOLUTION?
Keywords:
Islamic Taxation Policy, Conventional Debt, Financial Stability, Interest Tax Shield & Sukuk, Rental Tax Shield.Abstract
As, excessive conventional debt, causes financial crisis and financial instability. Many researchers pointed out that we should avoid riba based financing that is prohibited in Islam. We have proposed to abolish riba based financing, and promote Sukuk financing. In this study we will compare the performance of conventional debt vs Islamic debt in proposed Islamic taxation policy of leveraged firms. In order to analyze the data, the study has employed simulation tools and designed many experiments to examine how leveraged enterprises perform and how much they are worth in relation to both traditional and proposed tax policies. According to conventional tax policy tax benefit is available to debt and in proposed taxation policy tax benefit will be available to Sukuk. The results demonstrated that, in comparison to traditional debt, Sukuk is more advantageous for the firm's value and cost of capital. It is anticipated to improve the general financial stability of the corporate sector and lessen financial distress and insolvency.
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