Zakat in BusinessZakat in BusinessMGA1023MGA1023

PRINCIPLES OF BUSINESS PRINCIPLES OF BUSINESS MANAGEMENT MANAGEMENT

Prepared by:Prepared by:Cik Suhaila Abdul Hamid Cik Suhaila Abdul Hamid

Dr Zurina ShafiiDr Zurina Shafii

Zakat from the perspective of the Zakat from the perspective of the Islamic law Islamic law

An obligation for Muslims to fulfilAn obligation for Muslims to fulfilThe 3The 3rdrd from the 5 pillars in Islam from the 5 pillars in IslamIts importance is no different from the Its importance is no different from the other obligationsother obligationsMentioned in the Holy Al-Quran vis-à-vis Mentioned in the Holy Al-Quran vis-à-vis with prayers in 30 verseswith prayers in 30 versesThe hadith also emphasized on the The hadith also emphasized on the importance of paying zakatimportance of paying zakatAlways perceived as an act of worship Always perceived as an act of worship that has important effects in the societythat has important effects in the society

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

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

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

Definitions of Zakat Definitions of Zakat Literally Literally cleansing or purifying of something from cleansing or purifying of something from

dirt or filthdirt or filth Praise, growth and increasePraise, growth and increase

TheologicallyTheologically Spiritual purification resulting from paying Spiritual purification resulting from paying

zakatzakat

LegallyLegally Transfer of ownership of specific wealth to Transfer of ownership of specific wealth to

specific individual (s) under specific specific individual (s) under specific conditionsconditions

The main aims of zakatThe main aims of zakatOur worship to Allah for all His Our worship to Allah for all His bounties to mankindbounties to mankind Al-Baqarah: 267 “Oh ye believe! Give of Al-Baqarah: 267 “Oh ye believe! Give of

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

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

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

Act as a mechanism to distribute wealthAct as a mechanism to distribute wealth

……continuedcontinued

Purify one’s heart and self from Purify one’s heart and self from being stingybeing stingy Al-Tawbah: 103 “Of their goods take Al-Tawbah: 103 “Of their goods take

alms. That so thou mightest purify and alms. That so thou mightest purify and sanctify them..”sanctify them..”

Types of zakatTypes of zakat

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

RamadhanRamadhan and ends before the and ends before the eid’ fitreid’ fitr prayer)prayer)

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

Agricultural produce, reared animals, business, Agricultural produce, reared animals, business, gold and silvergold and silver

New types of wealth subject to zakatNew types of wealth subject to zakat

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

Beneficiaries of zakatBeneficiaries of zakat8 categories of beneficiaries:-8 categories of beneficiaries:- The poor The poor (masakin)(masakin) The needyThe needy (fuqara’) (fuqara’) AmilAmil (individuals who have the authority (individuals who have the authority

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

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

cause of Allah s.w.t)cause of Allah s.w.t)

…….continued.continuedIssue: are there 8 or 7 beneficiaries?Issue: are there 8 or 7 beneficiaries? DiscussionDiscussion

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

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

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

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

Conditions for becoming an Conditions for becoming an AmilAmil

MuslimMuslimPious personPious personMukallafMukallafA freedom man (not a slave)A freedom man (not a slave)A fair and just personA fair and just personDoes not come from the descendants of Does not come from the descendants of the Holy Prophet s.a.wthe Holy Prophet s.a.wTrustworthyTrustworthyIs not a blind personIs not a blind personIs not a deaf personIs not a deaf personMaleMale

Methods to determine the sources Methods to determine the sources of zakatof zakat

QiyasQiyas

WealthWealth

Al-Nama BinafsihAl-Nama Binafsih

Al-Mal al-NamiAl-Mal al-Nami

Favour the poor and the needyFavour the poor and the needy

QiyasQiyas A method that will be used by the Islamic A method that will be used by the Islamic

jurists and scholars in determining the jurists and scholars in determining the shariah practice if the subject /case is not shariah practice if the subject /case is not mentioned in the Holy Al-Quran, Hadith or mentioned in the Holy Al-Quran, Hadith or consensus (consensus (ijmakijmak). ).

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

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

Wealth Wealth taken from several hadith. taken from several hadith. For instance, as narrated by Mu’az bin For instance, as narrated by Mu’az bin

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

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

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

“productive wealth expansion”. “productive wealth expansion”. Those wealth or property which could in nature expand or Those wealth or property which could in nature expand or

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

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

Imam Nawawi and some Islamic scholars such as Ibn Imam Nawawi and some Islamic scholars such as Ibn Abbas, Ibn Mas’ud and Muawiyah for instance suggest Abbas, Ibn Mas’ud and Muawiyah for instance suggest that zakat on employment should follow the method of that zakat on employment should follow the method of Al-Nama BinafsihAl-Nama Binafsih. . Thus, according to them zakat on employment income is Thus, according to them zakat on employment income is payable on the day it is received provided that it meets payable on the day it is received provided that it meets the the nisabnisab The zakat is imposed based on the method it is gained The zakat is imposed based on the method it is gained and not the type of wealth (even though the wealth is and not the type of wealth (even though the wealth is received in the form of money)received in the form of money)

Al-Mal al- NamiAl-Mal al- Nami

This is another method to zakat wealth based This is another method to zakat wealth based on the concept of “productive wealth on the concept of “productive wealth expansion”. expansion”. However, it is imposed on wealth which is However, it is imposed on wealth which is gained from property or wealth which could gained from property or wealth which could not grow by itself for instance like business not grow by itself for instance like business wealth. wealth. Therefore, zakat is only payable when it meets Therefore, zakat is only payable when it meets the the haulhaul and the and the nisabnisab. . For instance zakat on business income will only For instance zakat on business income will only become payable if it meets the become payable if it meets the haul haul and and nisabnisab

Favour to the poor and needy Favour to the poor and needy This principle is being used by the This principle is being used by the

scholars if there are two reasons from scholars if there are two reasons from two different schools of thought to pay two different schools of thought to pay zakat on the same wealth at the same zakat on the same wealth at the same time. time.

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

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

Cont…Cont…

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

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

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

Zakat in business Zakat in business

Hadith from Rasulullah s.a.w as narrated Hadith from Rasulullah s.a.w as narrated by Abu Daud by Abu Daud “ …“ …indeed, Rasulullah s.a.w asked us to pay indeed, Rasulullah s.a.w asked us to pay

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

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

Conditions to fulfill to pay zakat on Conditions to fulfill to pay zakat on business business

The conditions that must be fulfilled to be The conditions that must be fulfilled to be subject to zakat :-subject to zakat :-• MuslimMuslim• A freedom personA freedom person• The wealth must be from halal sourcesThe wealth must be from halal sources

Those activities prohibited against Islam Those activities prohibited against Islam cannot be included in zakat calculationcannot be included in zakat calculation

Cont..Cont..

• Meet the nisab at the end of haulMeet the nisab at the end of haulThe nisab is 2.5% or equivalent to 85 grams of The nisab is 2.5% or equivalent to 85 grams of goldgold

• Meet the haulMeet the haul• Must be from productive propertyMust be from productive property

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

• Full ownershipFull ownership

Cont..Cont..

• The business sources including donation are The business sources including donation are subject to zakatsubject to zakat

• Exist the intention to be in businessExist the intention to be in businessThe intentionThe intention

The transactionThe transaction• The business property is not withdrawn for The business property is not withdrawn for

personal usepersonal use

Basic items in a businessBasic items in a business

• Fixed assetsFixed assets

Not subject to zakatNot subject to zakat

Income accrued from productive fixed Income accrued from productive fixed asset is subject to zakatasset is subject to zakat

Basic items in a business (cont..)Basic items in a business (cont..)

• current assets current assets • Based on the value of assets provided in Based on the value of assets provided in

the Balance sheet or assessment on the the Balance sheet or assessment on the inventory.inventory.

• Zakat is based on the equivalent value of Zakat is based on the equivalent value of the assetsthe assets

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

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

Basic items in a business (cont..)Basic items in a business (cont..)

• Intangible assetsIntangible assets

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

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

Basic items in a business (cont..)Basic items in a business (cont..)

Long term liabilityLong term liability• Long term liabillity to finance/ run the Long term liabillity to finance/ run the

business is subject to zakatbusiness is subject to zakat

Capital and Shareholders’ fundCapital and Shareholders’ fund• E.g. Paid up capital, premium accounts, E.g. Paid up capital, premium accounts,

accrued profit are subject to zakataccrued profit are subject to zakat

Types of calculating zakat on Types of calculating zakat on businessbusiness

Growth modelGrowth model• Owner’s equity + Long term liability – fixed Owner’s equity + Long term liability – fixed

assets – intangible assets +/- adjustments assets – intangible assets +/- adjustments

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

adjustmentsadjustments

Adjustments to be made to the Adjustments to be made to the calculation of zakat calculation of zakat

Deduct Deduct • income which are not subject to zakat such as income which are not subject to zakat such as

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

deposits for utilitiesdeposits for utilities• Creditors Creditors • Sources that zakat has already been paidSources that zakat has already been paid• Current assets must be productive, thus bad Current assets must be productive, thus bad

debts, obselete stock, depreciation are debts, obselete stock, depreciation are deducteddeducted

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

• Charity fund such as tabung khairat, Charity fund such as tabung khairat, education fund education fund

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

• Ending inventory Ending inventory • Those liabilities related to the business Those liabilities related to the business

operation e.g. trade creditors, payables.operation e.g. trade creditors, payables.

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

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

Add to current liabilityAdd to current liability• Not related to business operation e.g. Not related to business operation e.g.

restructuring of debtrestructuring of debt• Dividend payableDividend payable• OverdraftOverdraft• Financial leaseFinancial lease

ReferencesReferences

Basic readings: Basic readings: http://www.muis.gov.sg/cms/uploadedFiles/Corphttp://www.muis.gov.sg/cms/uploadedFiles/CorporateGOV/Zakat/zakat_on_business_formula.pdorateGOV/Zakat/zakat_on_business_formula.pdff. Zakat calculation based on working capital . Zakat calculation based on working capital model model Further readings:Further readings: Bahari & Hamat (2004)“Rethinking zakat on Bahari & Hamat (2004)“Rethinking zakat on

employment income”, unpublished paper presented in employment income”, unpublished paper presented in 66thth Asian Inter-university seminar on social Asian Inter-university seminar on social development, 14development, 14thth – 16 – 16thth May 2004. Available on the May 2004. Available on the net: net: <http://www.geocities.com/idmpresources/04ASEANZ<http://www.geocities.com/idmpresources/04ASEANZakariaZahri.pdf>akariaZahri.pdf>

Tutorial QuestionsTutorial Questions