BUSINESSZAKAT

BUSINESSZAKATISOBLIGATORYEVIDENCEOFTHEOBLIGATIONOFZAKAT

Allah S.W.T. Says; O you who believe! Spend of the good things which you have (legally) earned, and of that which We have produced from the earth for you, and do not aim at that which is bad to spend from it, (though) you would not accept it save if you close your eyes and tolerate therein. And know that Allah is Rich (Free of all wants), and Worthy of all praise. Al-Baqarah : 267 And perform AsSalat (Iqamat-a s-Salat), and give Zakat and obey the Messenger (Muhammad S.A.W) that you may receive mercy (from Allah). An-Nur : 56 The ulamas have agreed unanimously that Zakat is compulsory on business assets. Allah S.W.T. Says; Men whom neither trade nor sale divert them from the Remembrance of Allah (with heart and tongue), nor from performing AsSalat (Iqamat-a s-Salat), nor from giving the Zakat. They fear a Day when hearts and eyes will be Tovertuned (from the horror of the torment of the Day of Resurrection). An-Nur : 37 Abu Daud and Daraqutni reports from Samurah bin Jundub that The Prophet (PBUH) used to order us to pay Zakat out of what we have for sale. Maimun ibn Mihran explains: When the period for you to pay Zakat has arrived (i.e. haul is fulfilled), count the amount of cash that you have, and for business goods that you have, valuate it with your currency, and all debt by your customers that you are confident will be paid back to you must be taken into account, and then deduct from that your own debt, and pay Zakat over the balance that you have.

CONDITIONSGOVERNINGZAKAT

1. MUSLIM All business entities owned by Muslims are obligated to pay Zakat upon it. Businesses with mixed ownership (i.e. 80% equity ownership of Muslims), only the part owned by Muslims is obligated to be paid upon it. 2 ASSETS OR SERVICES THAT ARE HALAL (PERMISSIBLE BY SYARIAH) Business assets must be from halal sources and the business activities too must come from halal activities or services. All business properties that are haram either from physical aspect side ('ain) or from activities that are haram such as usury are excluded in the calculation of Zakat. 3. NISAB (MINIMUM AMOUNT) The nisab of business assets is the equivalent of 85 grams of gold (20 mithqal). When the value of the business assets are the same or exceeds nisab then Zakat is imposed on the stated assets. 4 HAUL (MINIMUM TIME PERIOD) value of the assets calculated from the the start of business until the end haul. The haul period is calculated from the date business is started. example haul for business is the financial year ending June or December. 5 PRODUCTIVE ASSETS Assets eligible for Zakat must be assets that are productive and can be developed (al nama') or has the potential to develop which means that it is able to generate income and profit. 6 FULL OWNERSHIP Owner has the right to manage his assets including selling, gifting it or letting out the said asset. Physical ownership (hiyazah) and absolute management ownership (tasarruf) must also exist simultaneously. 7.THE SOURCE OF BUSINESS ASSETS MUST BE FROM BUYING OR EXCHANGING Business assets must be obtained legally. Income from charity is also calculated as business assets and is subject to Zakat payment.

8 INTENTION (NIAT) TO DO BUSINESS Owner must have intention to do business (i.e. obtain profit) during ownership of trading goods (urud tijarah). 9. BUSINESS ASSETS ARE NOT FOR PERSONAL USE Assets acquired and owned to be used personally is not subject to business Zakat but is subject to other types of Zakat such as Zakat on earned income (for individual).

SUMMARYONBUSINESSZAKATCALCULATION

A Current Assets BDT XXX B Adjustments to current Assets:

Minus: BDT XXX C Adjustments to current Liabilities:

Minus: BDT XXX D Zakatable Value = A - B - C

Check if the value of D is subject to nisab (minimum amount)

BDT XX

If the amount equals to or exceeds nisab, multiply with business Zakat rate of 2.5%

Then multiply with percentage of Muslim ownership (Example: 65%) ZAKAT VALUE

BDT XXX

ATTENTION Although this method looks straight to the scope of Current Asset and Current Liability, indirectly, it also takes into account other scopes in business, for example, financing scope (equity and loan) and the scope of Fixed Assets used in the business. This is based on the following accounting equation: Current Asset Current Liability = Owners' Equity + Long-term Liability Fixed Asset Non-Current Asset The above equation is derived from the original equation which is: Assets = Liabilities + Equity ASSESSMENT METHOD Business Zakat calculation takes into account the business Current Asset position, deducted over several Current Asset and Current Liability items. Zakat = (Current Asset Adjustment in Current Assets Adjustment in Current Liability) X Muslim Share Ownership X 2.5% ZAKAT RATE 2.5% on assets eligible for Zakat, subject to nisab.

ADJUSTMENTS Adjustments or reconciliation should be made for items categorized as assets or liabilities to make sure Zakat calculations made truly fulfills the principles of syarak on the business assets to determine whether Zakat is imposed or not imposed. CURRENT ASSETS The following are Current Asset items that need to be readjusted i.e. DEDUCTED from Zakat calculation: a. Other debtors such as:

Loans given as they do not fulfill the criteria of full ownership. Prepaid such as prepaid insurance expenditure, tax on assets and vehicles because

they are considered non-traded assets. Advances/ Deposits such as to purchase fixed assets as they do not fulfill the

criteria of full ownership. Various deposits such as phone, water, electricity and building rent, as they do

not fulfill the criteria of full ownership. Income from fixed assets receivables such as rental and unrealized dividends do

not fulfill the criteria of full ownership. b. Office supplies assets used for office work is deducted because it is categorized as non- tradable assets. c. Raw materials are deducted because they are categorized as non-tradeable assets. d. Work in progress assets are deducted as they are categorized as non-tradeable assets. e. Fixed deposit and marketable Securities mortgaged for financial facilities are deducted because they do not fulfill the criteria of full ownership. f. Specific doubtful debtors do not fulfill the criteria of full ownership. g. Slow-moving/obsolete stock are categorized as non-tradeable assets OTHER DEDUCTIONS Other items that also need to be deducted and the basis for their exemptions are as follows: a. Welfare funds as it is not intended to be traded. b. Interest revenue and dividends from haram sources as the sources are impure.

c. Dividend received from sources that have already been paid Zakat can not be imposed twice on the same assets and in the same year.

d. Credit scheme receivables (is considered equal to loans because it refers to next year transaction) which is still classified as current assets.

CURRENT LIABILITIES (OPERATING) Operating liabilities will be deducted from current assets. This liability comes from the operational activities that have been benefited but payment has not been made. For example Trade Creditors, Salary payables, rent payable, assets, tax, audit fees payable, business tax, assessment tax and other accrued liabilities incurred from the use of electricity, phone, water, etc. Operating liabilities (current only) are permitted as deductions in business Zakat assessment. Common operating liability items are as follows : a. Trade creditor b. Salary/ wage payable c. Accrued operating expenses d. Current tax payable e. Other operating liabilities that is compulsory on operations CURRENT LIABILITIES (FINANCIAL) Non-operational liabilities will not be deducted from current asset. The following are current liability items that are financial and non-operational items : A. Other creditors such as :

Loans from other party as they fulfill the criteria of full ownership. Various deposits received as they fulfill the criteria of full ownership. Prepaid received as they fulfill the criteria of full ownership. Other accrued liabilities as these operations liabilities have become full ownership.

B. Financial liabilities for the following year. It is classified as the following years business for example loans reclassification because Zakat assessment is for the current years operations. Example items are:

Hire purchase Ijarah Thumma Al-Bai/ Ijarah Wal Iktina/ Finance lease Term loan Al Bai Bithaman Ajil

C. Overdraft, notes payable, short-term financial liabilities instruments as they fulfill the criteria of full ownership. D. Tax arrears as they fulfill the criteria of full ownership. Deductions are made on the year they are paid. E. Dividends payable, returns from fees, returns from compulsory saving and honorariums

payable must be added back because it must be purified by paying Zakat first. CONCLUSION FOR NON-OPERATIONAL LIABILITIES a. Item that can be classified as a financial source or a financial liability. b. Item categorized as reclassification. Any reclassified item represents the following years transaction, not representing the year assessed. c. Operations liabilities accrued from the previous year is deducted for that particular year.

ASSESSMENTSAMPLESAMPLECOMPANYACCOUNT

ABC Company BALANCE SHEET ENDING 31ST DECEMBER 2007 Notes 2008 2009 Fixed Assets Investment

50,000,000 4,000,000

52,000,000 3,900,000

54,000,000 55,900,000 CURRENT ASSETS Inventories Trade Debtor Various Debtors Fixed Deposit Due from the company Tax Receivable Cash at Hand and in the Bank

8,000,000 15,000,000 900,000 1,000,000 1,000,000 2,500,000 3,000,000

5,000,000 6,000,000 500,000 1,000,000 550,000 3,000,000 5,000,000

30,900,000 21,050,000 CURRENT LIABILITIES Business Creditors Other Creditors Loans Hire Purchase Debts to the Company Dividends Proposed

3,000,000 900,000 9,000,000 140,000 700,000 9,200,000

1,000,000 500,000 7,000,000 100,000 1,500,000 4,500,000

22940000 14600000 7960000 6450000 NET CURRENT ASSETS /

(LIABILITIES)

61960000 62350000 14000000 32,300,000

14,000,000 29,100,000

46300000 43,100,000s 13,410,000 450,000 1,800,000

17000000 450,000 1,800,000

FUNDED BY: Paid-up Share Capital Reserve/ Profit (Loss) Collected NONCURRENT LIABILITY Long-term Loans Hire Purchase Tax Arrears

15,660,000 19250000

NOTE: (Balance Sheet 2007) 5. Inventory amounting BDT 3,000,000 is raw material inventory. 6. Various debtors amounting BDT 900,000 is prepaid, collateral and utilities deposit. 7. BDT 500,000 is Secured Fixed Deposit. 8. Interest Revenue received from fixed deposits in conventional bank total BDT100,000. SAMPLE ZAKAT CALCULATION FOR- ABC Company A) CURRENT ASSETS BDT 30,900,000 B) MINUS: CURRENT ASSET ADJUSTMENTS

Amount Notes 3,000,000

900,000

500,000

100,000

1,000,000 2,500,000

8,000,000

Inventories Raw material assets, is not yet a tradeable asset Various Debtors Non-business Assets, not full ownership Fixed Deposit As collateral, not full ownership Interest Revenue received (fixed deposit) revenue from Due from the company not full ownership Tax Receivable For accounting purposes only

C) MINUS: CURRENT LIABILITIES ADJUSTMENTS

Amount Notes 3,000,000 900,000 3,900,000

Business Creditors business operations Other Creditors Accrued Expenses

Zakatable Amount = (A-B-C) 19,000,000 X 2.5% Muslim Ownership = 100% Zakat = 475,000

ZAKATandTAX

BUSINESS ZAKAT AND CORPORATE TAX TAX IS A RESPONSIBILITY TOWARDS THE COUNTRY - Payment of tax from a companys revenue is the responsibility of a company by the provisions of the Income Tax Act 1967. ZAKAT IS AN OBLIGATION TOWARDS THE RELIGION - Business Zakat is the obligation of each Muslim businessman (who has met all requirements) based to the clear and undisputed order in the Quran, Rasulullah S.A.W's hadith and the consensus of ulamas. ZAKAT IS PRESENTLY ALLOWED AS DEDUCTIONS - From the (Unit Trust/ Mutual Fund) assessment year 2005, the government has allowed Zakat as partial deductions in calculating corporate tax. THE DIFFERENCES BETWEEN TAX & ZAKAT - In the absence of an incentive of Zakat tax rebate, this does not invalidate Zakat or prevent the OBLIGATION of Zakat. ZAKAT PLANNING - It is very important for businessmen/ owners of companies to carry out Zakat planning apart from the tax planning that is usually carried out by companies. ADDITIONAL INFORMATION !!! For entrepreneurs who undertake service-based businesses and obtain income based on fees or commissions such as : COMMISSIONS ON SALE/ SERVICE NEGOTIATION FEES (Consultancy Fee) DIRECT SELLING DEALER (Multi Level Marketing, Direct Selling ) TAKAFUL AGENTS & UNIT TRUST AGENTS And the like and business operations are carried out without going through a business entity (without partnership), your Zakat is calculated based upon Zakat on earned income (Al Mal Al Mustafad).

FREQUENTLYASKEDQUESTIONSONBUSINESSZAKAT

QUESTION 1: What is the basis for asset valuation in business Zakat assessment? Business assets will be counted based upon values in the balance sheet of a certain or assessment of inventories available. QUESTION 2: Is Zakat imposed on trade debtors or account receivables? Zakat is imposed on trade debtors or account receivables when there is sufficient that the stated debtor will repay or have proof that the stated debt can be by evidence of collateral, letter of guarantee from a bank, etc. In the case debtor is doubted to be able to pay his/ her debt, Zakat is not imposed on it. QUESTION 3: What is the status of loans acquired by a company. Is it considered as a source that should be imposed Zakat? According to Imam Syafie, there is no condition of debt in deciding whether the asset is eligible for calculation of Zakat or not. According to Imam Syafie people who are in debt are obligated to pay Zakat as the assets obtained through debt is considered the debtors own assets as he/ she can utilise it fully according to his full will if the assets becomes his/ hers and a source to him/ her. QUESTION 4: Is Zakat imposed upon the profit or loss of a company? Zakat is assessed on full ownership assets, this means that for any type of business, the value of asset is stated in the balance sheet. Regarding the value of income and the value of asset is stated in the balance sheet. Regarding the value of income and performance of a business entity. Components in current assets can originate from the capital (equity) or loan investment or trade activity. Upon the date of assessment of the business Zakat, only current asset items that meet the requirements will be imposed Zakat after taking into account deductions, exemptions and adjustments that are permitted. That is why it is observed that companies that suffer a loss may have full ownership assets that meet requirements and have met the nisab value and thus are obligated to pay Zakat.

Center for Zakat Management 1/A Gulshan Avenue

Dhaka 1212 Bangladesh

Phone: +8802 8828255

Fax: 880-2-8827780

Email: info@czm-bd.org