DefinePK

Abstract

<jats:p>Economists and legal experts say, Interest Tax Shield (ITS) available to debt, causes over-indebtedness that ultimately causes financial crisis and financial instability. Many researchers pointed out the necessity to re-frame these subsidizing corporate tax regulations available to debt. We have proposed to abolish (ITS) and introduce, an Islamic corporate tax policy, Rental Tax Shield (RTS) available to Sukuk-al-Ijarah instead of ITS. For data analysis, the study used a simulation technique and drew different experiments to investigate the performance of leveraged and zero-leverage firms and their values with conventional tax policies and proposed tax policies. The findings showed that RTS from Sukuk financing is more beneficial, for a firm's value and cost of capital, as compared to ITS from debt financing. It is expected to mitigate financial distress and bankruptcy and will enhance the overall financial stability of the corporate sector.</jats:p>