Zakat in Business

1
Zakat in Business

• MGA1023
• PRINCIPLES OF BUSINESS MANAGEMENT
• Prepared by
• Cik Suhaila Abdul Hamid
• Dr Zurina Shafii

2
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

3
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.

4
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

5
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

6
continued

• Purify ones heart and self from being stingy
• Al-Tawbah 103 Of their goods take alms. That so
  thou mightest purify and sanctify them..

7
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

8
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)

9
.continued

• 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

10
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

11
Methods to determine the sources of zakat

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

12
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.

13
Wealth

• taken from several hadith.
• For instance, as narrated by Muaz 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.

14
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 Masud 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)

15
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

16
Favour to 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?

17
Cont

• 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-saimah) 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.

18
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.

19
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

20
Cont..

• 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

21
Cont..

• 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

22
Basic items in a business

• Fixed assets
• Not subject to zakat
• Income accrued from productive fixed asset is
  subject to zakat

23
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

24
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

25
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

26
Types of calculating zakat on business

• Growth model
• Owners equity Long term liability fixed
  assets intangible assets /- adjustments
• Working capital model
• Current assets current liability /- adjustments

27
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

28
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.

29
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

30
References

• Basic readings http//www.muis.gov.sg/cms/uploade
  dFiles/CorporateGOV/Zakat/zakat_on_business_formul
  a.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 lthttp//www.geocities.com/idmpresources/0
  4ASEANZakariaZahri.pdfgt

31
Tutorial Questions