27/11/2018

Zakat on business

Adjustments on conventional financial

accounts

Outline
• General conditions
• Specific conditions
• Reason for adjustment
– Some specific items in Balance Sheet

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General consideration
• Islam
– If mixed ownership, calculate Muslim portion
only.
• Complete Ownership (Milk taam)*
• Intention to do business (niyyah)*
• Haul*
• Nisab*

General condition (2): Complete

ownership
• Physical and usufruct
• This means:
– Not constrained by time
– Complete (mutlaq) authority to use, capitalise,
sell, donate, waqf, develop and invest at his/her
own will.
• How do you obtain this?
– Contractual agreement
– Exchange (istibdaal)
– Borne out of the existing ownership (e.g.
animals)

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General condition (3): Complete

ownership
• Incomplete ownership?
– Owning physical but not the usufruct (e.g.
owning house but rent to others)
– Enjoying usufruct without having ownership
(using a borrowed item, using waqf
properties, receiving permission to use asset)
• In fiqh term, zakatable asset is the asset
that fulfills both physical ownership (milk
hiyazah) and the ability to manage (milk
tasarruf) ~ maliki, shafi’e & hanbali

General condition (4): Intention

• Asset acquired for trading purposes
• Asset acquired for welfare fund, waqf,
education purpose is not zakatable.
• Trading purpose ~ current asset
• Non-current asset aka fixed asset – not
zakatable.
• Issues when the intention changes. Haul
starts or stops when intention changes, e.g
– the business is now an NGO
– The CA now becomes FA (not trading anymore)

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General condition (5): Haul &

Nisab
• According to Lunar calendar (qamariyyah),
i.e., 354 days.
• Additional capital during the year follows the
initial capital (original haul).
• Based on the Financial year end, i.e., Balance
sheet (Shafie) – look at the asset, liability
and capital.
• Nisab 85gm of gold
• Liability, is it deductible to arrive at the
nisab?
• Look at the nature of liability (discussed
later)

Specific consideration
1. Halal asset
2. Productive asset*
3. Acquired thru’ purchase/exchange*
4. Not for personal use*
5. Valuation of asset
6. Form of zakat payment
7. Trade obligation vs financial obligation*
8. Other types of zakat is calculated
separately*

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Specific (1 & 2): Halal & Productive

• Haram both: the physical appearance (zat) e.g. liquor, swine OR the
business activity e.g. gambling, brothel etc.
• For IFIs – mixing permissible and non-permissible products
– Zakat should still be paid
– To adjust/exclude impermissible income
• Productive is growing (an-numuy) or has the potential to grow, e.g.
– Cash (both in hand and at bank)
– Financial instruments such as share, bonds, securities
• Held for trading only (Instruments held to maturity is not zakated)
– Stock (finished good asset)
• RM & WIP is not zakatable
– FA such as building is not considered growing hence not zakatable
• It helps the growth of other assets, i.e trade asset
• BUT if it is rented, the rental amount is zakatable. The building itself is not.
– Trade debtor
• Net amount after deducting bad debt
• Financial debtor is not zakatable – because does not fulfill complete ownership
– Shares held for investment – not zakatable.
• E.g. Investment in Subsidiaries/associate
• Only the dividend is zakatable

Specific (3&4): acquired thru’

purchase/exchange & Not for personal use

• Asset received from donation is not

zakated in the first year received.
– Zakated in the subsequent year
– If the asset is sold during the year – zakated
the proceed
• Asset is not zakated if used for personal.

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Specific (7):Trade vs financial obligation

• Zakatable items only concerns with trading/tradeability and any asset
and liability arises.
• This includes Account Receivable and Account payable (in BS) because
this accounts arises out of trading activities.
• Financial creditor/debtor is not included because they are ‘not created’
by trading activity.
• Liability/obligation arises when A owes B. But what is the purpose of
owing? (i.e., the purpose of having debt)
• Nature of financial obligation. e.g. Ali borrows money from Bakr
(RM1000). A owes B. A has complete ownership of the money.
• Q? Who is being zakated? A
• Nature of trade obligation. E.g. A purchase goods from B on credit
(RM1000). A owes B. A doesn’t have complete ownership on money.
Because the money has been ‘transformed’ into good. Effectively, the
fund to purchase good has already been committed.
• Q? Who is being zakated? B
• The difference is …FO is not tied to anything (principal activities)while
TO is tied to something…

Specific (7):Trade vs financial obligation

If financial liabilities, the impact; If trade liabilities, the impact;

• In B/S of A:
– CA 10k,
– Trade creditor 2k,
– Fin. Creditor (Bakr) 1k
• Zakatable amt = CA-CL
– 10k-2k = 8k
• The 1k owes to Bakr is not
allowed to be deducted
because Ali has complete
ownership (the money is in
cash ac of Ali; Dr Cash Cr
loan).
• The money (1k) is zakated
on Ali.
This penalises those who borrows moneys without specific trading purposes (1st box)
• In B/S of A:
– CA 10k,
– Trade creditor 2k
– Trade creditor (Bakr) 1k
• Zakatable amt = CA – CL
– 10k – 3k = 7k
• The 1k owes to Bakr is
allowed to be deducted
because trading purpose.
(see Bakr BS-it is zakated
on Bakr).

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Specific (7):Trade vs financial obligation

If financial liabilities, the
impact;
• In B/S of Bakr:
– CA 30k,
– Trade debtor 3k,
– Fin. Debtor (Ali) 1k
• Zakatable amt = CA-CL
– 30k + 3k = 33k
• The 1k owed by Ali is not
included in the calculation
because:
– It is zakated on Ali. So
should not be double
zakating.
– It is not for trade purposes.
If trade liabilities, the
impact
• In B/S of Bakr:
– CA 30k,
– Trade debtor 3k,
– Trade Debtor (Ali) 1k
• Zakatable amt = CA-CL
– 30k + 3k + 1k = 34k
• The 1k owed by Ali is
included in the calculation
because ‘trading
purpose’.

Specific (7):Trade vs financial

obligation (contd4)
• Only includes the net amount – after
deducting the bad debt, and specific
provision for doubtful debt.
• General provision is not included
(randomly based on percentage in Ageing
Schedule is not acceptable)
• The bad debt and doubtful debt is only
zakatable when (the year) it is received.

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Specific (8) Other types of zakat is

calculated separately
• If there is other types of wealth (apart
from business), this must be assessed
separately, e.g.:
– Income from Al-mustaghallat
– Salary and other employment income
– Gold
– Shares

Reasons for adjustment

1. Complete vs incomplete ownership
i. Trade debtor/creditor vs financial
debtor/creditor
2. Trading vs non-trading purpose/intention
– Trade asset and fixed asset
3. Double zakating
4. Welfare funds
5. Halal vs haram
6. Current year vs previous year assessment

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Eg.(1): complete vs incomplete ownership:

• Fund/Money lent to others in the form of financing/loan/investment
results in losing “complete ownership” (Cr Cash; Dr. Loan/Financing
receivable or Dr Investment)
– It is zakated on those who receive the fund (that’s why the
lender/investor should exclude this from his Current Asset)
– E.g. Loan/financing such BBA, OD, Term Loan etc is zakated on the
borrower
– Trade loan/financing – allowed to be deducted because “trade” but only
current year installment
• e.g. trade receipt, bankers acceptance, trust receipt
• Lending provided based on trade import document.
• Deposit received (CL) from other company vs deposit paid (CA) to
other to secure utilities. Zakat should be paid by the one who received
the deposit money.
• Dividend receivable/received vs dividend payable/paid
– Zakated after declared or received? Received…
– Net dividend received (after being zakated by dividend payer)
• Uncollectible debtor
– Zakated when received later – bad debt recovered.
• Rent receivable vs rent payable
• AAOIFI (FAS 9) terms complete ownership as unencumbered
possession

Examples of items (1.i): Nature of

creditor/payables
• Zakated on trading purposes only, such as
trade creditor; and
• liability or/and creditor arises out of
trading operation such as normal
expenses (wages payable, electricity,
utilities and tax payable).
• For financial creditor, the amount lent is
only zakatable when realised, i.e., when
the creditor paid the debt (i.e., zakat on
cash/CA)

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Examples of items (2): Trade asset

• Zakatable asset is asset purchased/readied for
resale.
• For construction or manufacturing, where raw
material and Work in Progress forms parts of the
asset in BS, this is excluded in calculating zakat –
not in a tradeable condition as yet.
• However if the principal activity of the companies
is selling the RM or WIP, then it is zakatable.
• Trade asset which becomes fixed asset is not
zakatable.
• However, in UK, US & Canada – RM & WIP is
zakatable.

Examples of items (2): Fixed

asset
• FA is non-current asset hence not zakatable
(building, machinery, plants, motor vehicles).
• If this asset is rented out/sold, the income
(NOT the value of asset) from rental or the
proceed from sale is zakatable.
• Productive FA is al-mustaghallat.
• Similarly, share held for investment –
treatment as if it is FA – zakatable only on
the income received (dividend) NOT the
value of the share + dividend.
• Intangible asset – not a wealth, so excluded.

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Examples of items (3): Double

zakat
• Zakating the same source/money.
• Trade creditor is allowed to be deducted (i.e., it is not a source of
zakat) because the source is already zakated on the one who sells
(seller, i.e. the debtor amt in his/her SOFP).
• I purchase from U. In my ac, U are my creditor. In your ac, I am
your debtor. The amt is zakated on U (in item debtor/AR in SOFP).
Therefore, in my ac, I cannot just do nothing. I must deduct the
same amt (creditor/AP item in SOFP). If I do not deduct, it means
the amount is zakated twice - at your & my end.
• Therefore, there should not be double zakat on the same
source/money.
• E.g. Ali sells goods on credit to Bakr (RM1,000). In Ali’s financial
account, Bakr is the trade debtor (CA). To calculate Ali’s zakat, the
trade debtor is included in the calculation, i.e. RM1,000 x 2.5%.
• In Bakr’s financial account, Ali is the trade creditor. The amount
must be deducted from his (Bakr) CA to arrive at the zakatable
amount. If we did not deduct the amount, we have double zakat
because we are zakating from the same source/money.

Examples of items (4): Welfare

fund
• Funds intended for society’s benefit. (e.g. waqf
fund)
• This has to be excluded in CA because there is no
exact owner (the owner is society at large!!!)
• However, any amount donated/set up in the last
quarter of the year must be included back.
– To pay zakat first on the amount (hence included in
calculation)
– To avoid using the fund for the purpose of reducing
zakatable amount.
• If this fund is stated in the note or in the equity
side (reserve fund), this should be deducted.

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Items (5): Impermissible item

• Items such as interest received or/and
dividend from impermissible investment
• Interest revenue obtained from Income
statement
– FD, Bond
– Interest-based financial instruments
• If there is SSB and Shariah auditor, some
of the info can be obtained from them.

Examples of items (6): year of

assessment
• Tax is incurred because the company is involved in
business.
• Thus, it is necessary to ensure business is in existence
(i.e., not paying tax implies that co’s cannot exist).
• Tax payable is allowed to be deducted. BUT ONLY the
current year portion. Accumulated unpaid tax from
previous years is not allowed because it should have
been considered in the year it incurred.
• The fact that you have not paid the previous year
outstanding amount is irrelevant because you may
have used the money/fund – meant for tax - for your
own benefit and delaying paying the tax.
• Therefore, any deferred tax liabilities should include
only the current year portion

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