How does the imposition of the jizya tax on non-Muslims reconcile with the principle of "there shall be no compulsion in religion"?

There is no contradiction between collecting jizya (tribute) and not compelling the People of the Book to embrace Islam. Many Jews and Christians remained secure in their faith under Muslim rule. The Prophet, peace and blessings be upon him, did not compel anyone to embrace Islam; rather, he only fought those who fought him, in compliance with the words of the Almighty: "There is no compulsion in religion: true guidance has become distinct from error."

The wisdom behind the legitimacy of jizya lies in its being: 1. A sign of submission and obedience to Muslim rule. 2. A means to guide the People of Dhimma (protected non-Muslims). 3. A means to avoid extermination and persecution. 4. A financial resource for the Islamic state to spend on public welfare.

Indeed, the People of Dhimma considered jizya a great blessing that protected them. The "humiliation" (ṣaghār) mentioned in the verse, "until they give the jizya willingly while they are humbled," means their submission to the rulings and authority of Islam.