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22/11/2018

Zakat on companies

Method of calculation

Presentation outlines
• Overview of accounting
• Method of calculation
• Method of valuation
• Mixed shareholdings (Muslim & non-
muslim)

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22/11/2018

Overview on zakat calculation


• Companies starts from capital. So if company
is zakated, it should be on capital.
• Capital = individual owner + JV + loan.
• Owner has full control on the use of fund
(concept of milk taam)
• If all capital is used for trading activities, the
capital and the profit is zakatable (an ideal
situation)
• Reason: zakat is incurred on thing that grows
(an-numuy, zaka)

Overview on zakat calculation


• In reality, the capital is used for various purposes:
– Building factory, warehouse etc (FA)
– Purchasing machinery, fixtures, fittings (FA)
– Establishing subsidiaries (NonCA)
– Investing in long term shares, bonds (NonCA).
– Purchasing stock for trading purposes (CA)
• Using Financial Statement, zakat is incurred on business
activities for the past one year.
• As discussed, zakat is incurred only on trading activities. Hence
any trading liabilities incurred (normally CL) in order for the
business to stay going concern, is allowed to be deducted from
trading asset – to arrive at zakatable amount.
• Similarly, any growth happened on the capital (i.e., the
existence of profit/surplus) is zakated after deducting the
noncurrent asset (normally FA).

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Method of measurement
• Hence, we are looking at two perspectives, i.e.,:
– Net Current Asset/Net Working Capital (Syariyyah)
– Net Owner’s Equity Capital (Urfiyyah) (practiced by
zakah agency in Saudi)
• Logically (urf), zakat is on capital to start business,
therefore, the NOEC method is:
Owners’ equity + LTL + Profit/surplus for the
year – Fixed Asset – Other Non Current Assets
• FA is not growing hence not zakatable (disregard
mustaghallat here…)

Method of measurement
• NCA is syariyyah because the spirit of Islamic
jurisprudence implies that NCA is similar to
urudh attijarah (UT), i.e., business stock.
• Jurists states that UT is commodities
obtained for the purpose of resale for profit.
• Thus, the liabilities incurred in securing the
assets is also allowed for deduction, hence,
NCA method is:
• Current Asset (milk taam) – Current
Liabilities (operational/ trading only)

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Method of measurement
• Both methods result in the same amount
as this is the accounting equation.
• OE + LTL – FA = CA – CL
• However, both methods requires some
adjustments (as discussed in previous
class).
• Using NCA methods, the calculation of
zakat is
• CA – CL +/- adjustments = zakatable
amount

Methods of Measurements
• Some scholars adjust the NCA to reflect
only operational activity.
• Badawi and Sultan (Net Growing Capital
Method)
• FORMULA= Net Working Capital
Add back short term debt (i.e., CL used to:
a) finance fixed assets
b) pay off long term debt
c) reduce capital stock
Less long term debts used to finance current
assets
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Methods of Measurements
• Notes:
– The latest method; complicated & more objective
method(?)
– Provides reconciliation / adjustment for NCA, to
make sure that NCA reflects trading activity
– Reflects true and fair value of NTA by adjusting
items that distort / misrepresent CA and CL
– Adjustments need to be done in several unique
situations which distorts the NCA value – hence –
consequently distorts the amount of zakat due

Methods of Measurements
• Examples:
– Buy FA using CL (results in higher CL, hence
undervalue NCA. Thus, should be minus from CL so
that the amount of NCA increase back).
– Pay LTL using CL (results higher CL, hence
understate NCA. This should be minus from CL, so
that NCA increase again)
– Buy back own share using CL (eg. OD) (result
higher CL, thus undervalue NCA. Thus, should be
minus from CL so that the amount of NCA increase
back)
– Buy CA (e.g. inventories) using LTL (result higher
CA, thus overstate NCA). This should be minus back
from CA to reduce the amount of NCA)
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Example: Zakat calculation


NCA method
CA (per BS) 50,000
CL (per BS) (27,000) 23,000
Adjustment to:
CA: Minus
- Financial Debtor 5,000
- Raw material 1,500
- Divd receivable 500
- Waqf fund 300
- Interest received 700 (8000)
CA: Add back
- Donation @ last 700
quarter
- Purchase FA using CA 8,300 9,000
24,000

Cont’d: Zakat calculation


Continued (cf) 24,000
CL: Add back
- Prepayment received 200
- Financial creditor 2,400
- Deposit received 500
- Tax payable (long overdue) 5,600
- Dividend payable 300 9,000
CL: Add back (you deduct this amt
before. This entry sb added back)

- Purchasing FA using OD 1,000


- Paying back LTL using OD 2,000 3,000

Zakatable amount 36,000 (Nisab =


RM13,113)
Zakat payable (Rate @ 2.5%) 36k x 2.5%
*If Muslim shareholding is only 36k x 2.5% x 65%
65%

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Zakat on Trade – Companies


• Scope:
– Limited and public limited companies
– Levied on the company as a whole
– If the company does not pay zakat on trade,
then the shareholders are liable to pay zakat
based on their shareholdings (individually)

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Zakat on Trade – Companies


• Deduction:
– Zakat payable deductible from profit before distribution to
shareholders as dividend (provided it is approved by the
AGM)
• NPBTBZ – Zakat = NPBTAZ – tax = NPATAZBD
– In the case of Muslim and non-Muslim shareholders, zakat
payable should be based on the ratio of share ownership
– Normally, non-Muslim profits are distributed without
deduction of zakat. In other words, non-Muslims may get
more dividends than Muslims

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Other methods

• Prof. Kamal Atiyah


– Zakatable amount = NCA + Profit for the year
– Rationale:
• Some companies may have low NCA but high profit
• If the focus is given solely to NCA, some companies may
not pay zakat
– Drawbacks
• Profit can be misleading
• May double charge the entity
– Unfair
– Burden the zakat payer

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Limitation on current FS
• Some limitations:
– Information needed are not available in FS
– Difficult & time consuming for both zakat payer & zakat
authority to trace all transactions (not practical)
– Must have a zakat officer with [sufficient] accounting knowledge
to identify the transactions
– Valued assets at historical cost
• Shariah requires ‘current value’
– Quality of information provision
• Reliability issues.
• Creative accounting.
• Professional judgment
• Unethical conduct, etc.
– Availability of internal & external information of how FA are
bought? (LTL, CL or Cash?)
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