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CHAPTER 15

ZAKAT ON BUSINESS INCOME

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LEARNING OBJECTIVES

1. Understand the definition and types of zakat.

2. Understand the reasons for zakat payment imposed to Muslims

3. Identify the beneficiaries of zakat.

4. Identity the methods of determining the sources for zakat

5. Identify the conditions to be met before zakat on business income to be made

6. Understand the methods of calculation for zakat on business income.

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Zakat from the perspective of the Islamic law An obligation for Muslims to fulfil The 3rd from the 5 pillars in Islam Its importance is no different from

the other obligations Mentioned in the Holy Al-Quran vis-

à-vis with prayers in 30 verses The hadith also emphasized on the

importance of paying zakat Always perceived as an act of

worship that has important effects in the society

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The history of zakat payments

Prior to Hijrah, zakat is only compulsory to those wealthy people who are close with the Prophet s.a.w.

At that time, the obligation to pay zakat is based only on their awareness, willingness, discretion

An organized system of zakat (for instance having the conditions for nisab, rate and haul ) was only applied after the 2nd year of Hijrah.

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Definitions of Zakat

Literally cleansing or purifying of something

from dirt or filth Praise, growth and increase

Theologically Spiritual purification resulting from

paying zakat Legally

Transfer of ownership of specific wealth to specific individual (s) under specific conditions

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The main aims of zakat

Our worship to Allah for all His bounties to mankind Al-Baqarah: 267 “Oh ye believe! Give of

the good things which ye have (honourably earned). And of the fruits of the earth which we have produced for you..”

Assist the poor and the needy Al-Dzariyat: 19 “and their wealth and

possessions (was remembered) the right of the (needy)..”

Act as a mechanism to distribute wealth

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The main aims of zakat

Purify one’s heart and self from being stingy

Al-Tawbah: 103 “Of their goods take alms. That so thou mightest purify and sanctify them..”

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Types of zakat

Two main types of zakat: Zakat fitr (due from the starting

of Ramadhan and ends before the eid’ fitr prayer)

Zakat on mal (wealth) Traditional types of wealth subject to

zakat Agricultural produce, reared

animals, business, gold and silver New types of wealth subject to zakat

Various forms of wealth based on the consensus of Islamic scholars and jurists e.g. employment income, professional income

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Beneficiaries of zakat

8 categories of beneficiaries:- The poor (masakin) The needy (fuqara’) Amil (individuals who have the authority

and responsible to collect zakat) Mualaf (people who convert to become

Muslims) Ar-riqab (to free the captives)* Ibnu sabil (the wayfarer) Gharimin (those in debt) Fisabillillah (deeds accomplished in the

cause of Allah s.w.t)

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Beneficiaries of zakat (cont’d)

Issue: are there 8 or 7 beneficiaries? Discussion

some states in Malaysia have only 7 beneficiaries since nowadays there are no more slaves (captives)

However, there are other states which still maintain the number of beneficiaries of 8 people.

The reason is because it is stated in the Holy Al-Quran that there are 8 beneficiaries of zakat

Due to that, ar-riqab is implied as zakat for those who would like to free themselves from ignorance for instance zakat paid to people who would like to further their studies

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Conditions for becoming an Amil

Muslim Pious person Mukallaf A freedom man (not a slave) A fair and just person Does not come from the

descendants of the Holy Prophet s.a.w

Trustworthy Is not a blind person Is not a deaf person Male

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Methods to determine the sources of zakat

Qiyas Wealth Al-Nama Binafsih Al-Mal al-Nami Favour the poor and the

needy

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Qiyas

A method that will be used by the Islamic jurists and scholars in determining the shariah practice if the subject /case is not mentioned in the Holy Al-Quran, Hadith or consensus (ijmak).

Qiyas is a practice to imply a subject with an existing shariah treatment.

The use of Qiyas in zakat is encouraged and it has been widely practised by the Islamic jurists. For instance, employment income is subject to zakat because it is similar to gold and silver. Therefore, the rate and the haul are equivalent to the rate and haul of zakat on gold and silver.

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Al-Nama Binafsih This is a method to zakat wealth based on the

concept of “productive wealth expansion”. Those wealth or property which could in

nature expand or grow by themselves for instance the agricultural produce such as paddy will fall under this category of wealth.

There is no haul condition to be fulfilled for this type of wealth. Zakat is payable once the wealth is gained and the quantity is enough to meet the nisab.

Imam Nawawi and some Islamic scholars such as Ibn Abbas, Ibn Mas’ud and Muawiyah for instance suggest that zakat on employment should follow the method of Al-Nama Binafsih.

Thus, according to them zakat on employment income is payable on the day it is received provided that it meets the nisab

The zakat is imposed based on the method it is gained and not the type of wealth (even though the wealth is received in the form of money)

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Wealth taken from several hadith. For instance, as narrated by

Mu’az bin Jabal, the holy Prophet s.a.w had instructed his amil to inform the Yemen people that zakat must be paid by the wealthy people to be distributed to the poor and the needy.

Due to this, there is an opinion that says zakat is payable on all wealth, irrespective of the physical form of the wealth.

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Al-Mal al- Nami

This is another method to zakat wealth based on the concept of “productive wealth expansion”.

However, it is imposed on wealth which is gained from property or wealth which could not grow by itself for instance like business wealth.

Therefore, zakat is only payable when it meets the haul and the nisab.

For instance zakat on business income will only become payable if it meets the haul and nisab

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Favouring the poor and needy

This principle is being used by the scholars if there are two reasons from two different schools of thought to pay zakat on the same wealth at the same time.

Therefore, the approach is to choose the method that will favour the poor and the needy.

For instance, when there is taraddud which means argument due to similarity or ambiguity between two wealth such as should the rate of zakat for money be based on qiyas on gold or qiyas on silver?

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Favouring the poor and needy (cont’d)

The jurists conclude that it is better to base on silver since the value is higher and there is not disagreement on the nisab of silver that subject to zakat

Reared animals for instance could fall under either zakat on reared animals ( al-sa’imah) or zakat on business income (al-tijarah).

In this case, normally the jurists will choose zakat on business income rather than zakat on reared animals because it favours more the poor and the needy.

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Zakat in business Hadith from Rasulullah s.a.w

as narrated by Abu Daud “ …indeed, Rasulullah s.a.w asked

us to pay zakat from the property that we prepare to sell”

All kind of businesses owned by Muslims are subject to zakat.

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Conditions to fulfill to pay zakat on business

The conditions that must be fulfilled to be subject to zakat :-• Muslim• A freedom person• The wealth must be from halal

sources Those activities prohibited

against Islam cannot be included in zakat calculation

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Conditions to fulfill to pay zakat on business (cont’d)

• Meet the nisab at the end of haul The nisab is 2.5% or equivalent to 85

grams of gold

• Meet the haul• Must be from productive property

E.g cash, shares, bond, ending inventory, fixed assets (movable or immovable), net trade receivable

• Full ownership

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Conditions to fulfill to pay zakat on business (cont’d)

• The business sources including donation are subject to zakat

• Exist the intention to be in business The intention The transaction

• The business property is not withdrawn for personal use

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Basic items in a business

• Fixed assets Not subject to zakat Income accrued from

productive fixed asset is subject to zakat

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Basic items in a business (cont..)• current assets

• Based on the value of assets provided in the Balance sheet or assessment on the inventory.

• Zakat is based on the equivalent value of the assets

• Zakat is imposed on accounts receivable if it is assured that the debtor will pay back

Zakat will only be imposed in the year when the debt is collected

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Basic items in a business (cont..)

• Intangible assets E.g. Shares, patent, goodwill,

bond, certificate of investment are considered equivalent to fixed assets if they are not traded but held in the purpose to gain dividend.

If the company invested in has already paid zakat, thus the income is no longer subject to zakat

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Basic items in a business (cont..)

Long term liability• Long term liabillity to finance/ run

the business is subject to zakat Capital and Shareholders’ fund

• E.g. Paid up capital, premium accounts, accrued profit are subject to zakat

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Types of calculating zakat on business

Growth model• Owner’s equity + Long term liability

– fixed assets – intangible assets +/- adjustments

Working capital model• Current assets – current liability +/-

adjustments

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Adjustments to be made to the calculation of zakat

Deduct • income which are not subject to

zakat such as prohibited sources• amount are not wholly owned such

as deposits for utilities• Creditors • Sources that zakat has already

been paid• Current assets must be productive,

thus bad debts, obselete stock, depreciation are deducted

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Adjustments to be made to the calculation of zakat (cont..)

• Charity fund such as tabung khairat, education fund

Charity fund which has the concept of rolling fund is not subject to zakat on the principal amount only.

• Ending inventory • Those liabilities related to the

business operation e.g. trade creditors, payables.

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Adjustments to be made to the calculation of zakat (cont..)

Add to current assets• All gift, donations paid by the

company Add to current liability

• Not related to business operation e.g. restructuring of debt

• Dividend payable• Overdraft• Financial lease

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References

Basic readings: http://www.muis.gov.sg/cms/uploadedFiles/CorporateGOV/Zakat/zakat_on_business_formula.pdf. Zakat calculation based on working capital model

Further readings: Bahari & Hamat (2004)“Rethinking zakat on

employment income”, unpublished paper presented in 6th Asian Inter-university seminar on social development, 14th – 16th May 2004. Available on the net: <http://www.geocities.com/idmpresources/04ASEANZakariaZahri.pdf>