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Zakah For Business

1. Conditions Governing Zakat

The following conditions must apply to the said business before Zakat is made obligatory.

1. Muslim

Only Muslims need to pay Zakat. Thus, in a business company where ownership is split between a Muslim & non-Muslim, only the Muslim’s share of the business is subjected to Zakat.

2. Full Ownership

Zakat is payable only on the shared capital or company shares owned by the owner and NOT INCLUDING any shared capital made up of or company shares that were purchased by borrowed money.

3. Intention to do business

4. Haul is completed (Minimum Period)

5. Nisab is reached (Minimum Amount)

2. Quantum of Zakat

2.5% on the portion of the assets (business assets) that are subjected to Zakat upon completion of haul & nisab

3. Computation Method (“Working Captial Model”)

. Net Currents Assets: Ascertain the net current assets of the company concerned.
2. Percentage of Ownership: Ascertain the percentage of interest in the company owned by Muslim individuals.
3. Formula: Zakat Payable = (Net Current Assets (+/-) *Adjustments – Conventional Bank interest)
x Percentage of Muslim Ownership
x 2.5%

*Adjustment Terms

These are adjustments needed in the current assets and current liabilities.

· Items Deducted from Current Assets (-):

i. Items that are not Zakat obligated
Items such as riba’, gambling and liquor are to be withdrawn from the zakat calculations because they are items or products that are non-permissible i.e. ‘haram’.

ii. Limited Ownership
Water, telephone, electrical and its similar kinds of deposit shall be deducted as it does not comply with the requirements of full rights.

iii. Loan Receivable
The money on loan to a borrower is based on the characteristics of full ownership that has been transferred to the borrower. The borrower then possesses the full right & freedom to exploit and manage the loaned financial resources for his own interest and gain. Thus, the borrower is obligated to perform Zakat on the amount of money loaned and NOT the Company.

iv. No items are to be paid Zakat for, twice
The dividend income that has already been deducted for Zakat may be zakat exempted.

v. Current Assets must be productive
Bad Debts, expired stocks and depreciation that is permanent should be exempted.

vi. Charitable Funds
Charitable funds such as khairat and education funds in current assets may be exempted from Zakat. Nevertheless, charitable funds that are business in nature such as a Qardhul Hassan loan, the amount exempted from Zakat is the principle value while funds that are charitable in nature such as donations and khairat, only the balance amount is exempted.

vii. Inventory / Stock category
Only the end product is subjected to Zakat. Raw materials or any items in production is exempted from Zakat.

· Items Added to Current Assets (+):
All contributions, donations and alms made by any of the business entity at the end of haul (the last quarter) shall be added again (with the assumption that the donations made will not affect the company’s liquidity) into the current assets. This is because any amount channelled for charitable purposes, are still obligatory to Zakat unless the source is from a charitable fund.

· Items Added to Current Liabilities (+):
According to Imam Shafie, there are no debt requirements that pre-determine on whether the assets are qualified for the nisab or not. Imam Shafie’s opinion is that financial loans (not commercial liabilities) do not affect the obligations of Zakat. Thus, adjustments only involve those items that are not deductible such as:

  • Those not in the form of business operations such as financial loans and the classifications of scheduled refinance.
  • Dividends payable
  • Overdraft
  • Financial / Capital Lease

To qualify for nisab, the current liabilities that can be deducted are those operational in nature that includes:

  • Trade creditors
  • Operating payables such as salaries, electrical and phone bills
  • Taxes based on current assessment

Zakat Calculation Based on Working Capital Model (In reference to *AAOIFI FAS 9 – Zakat)

· Current Assets

  • Cash Balance: £XXX
  • Bank Balance: £XXX
  • Closing stocks: £XXX
  • Trade debtors: £XXX
  • Prepayments: £XXX
  • Other Current Assets: £XXX

· Less Current Liabilities

  • Trade Creditors: £XX
  • Financial loans: £XX
  • Short-term payable / Dividends payable: £XX
  • Overdraft: £XX
  • Financial/Capital Lease: £XX

Net Current Assets: £XXX<
+/- Adjustments

Minus Current Assets:

  • Non-halal factors e.g. Interest, gambling, liquor, non-halal product: £X
  • Deposit for expenses: £X
  • Loan receivable: £X
  • Items that have been paid Zakat, e.g. Dividends: £X
  • Bad debts, obsolete stocks, any substantial devalued items X
  • Staff fund in Current Assets: £X
  • Staff loan: £X
  • Raw stocks/work-in-progress stocks: £X

Add Current Assets:

  • Donations: £X

Add Current Liabilities:

  • Non-operating financial loans: £X
  • Dividends payable: £X
  • Overdraft: £X
  • Financial/ Capital Lease: £X

. Net Currents Assets: Ascertain the net current assets of the company concerned.
2. Percentage of Ownership: Ascertain the percentage of interest in the company owned by Muslim individuals.
3. Formula: Zakat Payable = (Net Current Assets (+/-) *Adjustments – Conventional Bank interest)
x Percentage of Muslim Ownership
x 2.5%

*Adjustment Terms

These are adjustments needed in the current assets and current liabilities.

· Items Deducted from Current Assets (-):

i. Items that are not Zakat obligated
Items such as riba’, gambling and liquor are to be withdrawn from the zakat calculations because they are items or products that are non-permissible i.e. ‘haram’.

ii. Limited Ownership
Water, telephone, electrical and its similar kinds of deposit shall be deducted as it does not comply with the requirements of full rights.

iii. Loan Receivable
The money on loan to a borrower is based on the characteristics of full ownership that has been transferred to the borrower. The borrower then possesses the full right & freedom to exploit and manage the loaned financial resources for his own interest and gain. Thus, the borrower is obligated to perform Zakat on the amount of money loaned and NOT the Company.

iv. No items are to be paid Zakat for, twice
The dividend income that has already been deducted for Zakat may be zakat exempted.

v. Current Assets must be productive
Bad Debts, expired stocks and depreciation that is permanent should be exempted.

vi. Charitable Funds
Charitable funds such as khairat and education funds in current assets may be exempted from Zakat. Nevertheless, charitable funds that are business in nature such as a Qardhul Hassan loan, the amount exempted from Zakat is the principle value while funds that are charitable in nature such as donations and khairat, only the balance amount is exempted.

vii. Inventory / Stock category
Only the end product is subjected to Zakat. Raw materials or any items in production is exempted from Zakat.

· Items Added to Current Assets (+):
All contributions, donations and alms made by any of the business entity at the end of haul (the last quarter) shall be added again (with the assumption that the donations made will not affect the company’s liquidity) into the current assets. This is because any amount channelled for charitable purposes, are still obligatory to Zakat unless the source is from a charitable fund.

· Items Added to Current Liabilities (+):
According to Imam Shafie, there are no debt requirements that pre-determine on whether the assets are qualified for the nisab or not. Imam Shafie’s opinion is that financial loans (not commercial liabilities) do not affect the obligations of Zakat. Thus, adjustments only involve those items that are not deductible such as:

Those not in the form of business operations such as financial loans and the classifications of scheduled refinance.

Dividends payable

Overdraft

Financial / Capital Lease

To qualify for nisab, the current liabilities that can be deducted are those operational in nature that includes:

Trade creditors

Operating payables such as salaries, electrical and phone bills

Taxes based on current assessment

Zakat Calculation Based on Working Capital Model (In reference to *AAOIFI FAS 9 – Zakat)

· Current Assets

Cash Balance: £XXX

Bank Balance: £XXX

Closing stocks: £XXX

Trade debtors: £XXX

Prepayments: £XXX

Other Current Assets: £XXX

· Less Current Liabilities

Trade Creditors: £XX

Financial loans: £XX

Short-term payable / Dividends payable: £XX

Overdraft: £XX

Financial/Capital Lease: £XX

Net Current Assets: £XXX<
+/- Adjustments

Minus Current Assets:

Non-halal factors e.g. Interest, gambling, liquor, non-halal product: £X

Deposit for expenses: £X

Loan receivable: £X

Items that have been paid Zakat, e.g. Dividends: £X

Bad debts, obsolete stocks, any substantial devalued items X

Staff fund in Current Assets: £X

Staff loan: £X

Raw stocks/work-in-progress stocks: £X

Add Current Assets:

Donations: £X

Add Current Liabilities:

Non-operating financial loans: £X

Dividends payable: £X

Overdraft: £X

Financial/ Capital Lease: £X

Total Net Assets due for Zakat: £XXXX.XX

X Zakat Rate 2.5% X(%) Muslim Ownership share in business

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