chapter 4 - Zakat accounting on modern wealth.pptx

Zakat accounting on modern wealth

1. Zakat accounting on modern wealth MAL AL-MUSTAFAD, MAL AL-MUSTAGHALLAT, FINANCIAL SECURITIES

2. Introduction Quran does not define types of zakatable wealth nor does it provide the rate for zakat to be paid. However, Quran mentions a few kinds of zakatable assets : Gold and silver (al-Tawbah:34) Crops and fruits (al-An’am:141) Earning of trade and other business enterprises (al-Baqarah:267) What is drawn from beneath the earth (al:Baqarah:267) Gold Crops Fruits Minerals

3. Except for these, Quran mentions zakat only in general world amwal (means assets or wealth). “Take sadaqah from their wealth in order to purify them and sanctify them with it” (al-Tawbah:103) “In their wealth and properties is the right of the beggar and the mahrum (the poor who does not ask the other)’ (al-Dariyat:19)

4. The Prophet does not obligate zakat on assets obtained for personal use . “A Muslim is not zakatable for his mare or for his servant” (narrated by Muslim) - basis of exemption for assets for personal use. Prophet impose zakat on growing and producing as sets such as: Livestock such as camels, cows and sheep Money made from gold or silver use as cash business assets and as savings Crops and fruits, esc basic foods (e.g. wheat, barley, date and raisin) Treasures hidden underground by ancients’ pre Islamic ages and mineral stored by Allah swt inside and on the surface of the earth Prophet did not mention certain types of assets as zakatable was not an indication of non- zakatbility because he only mentioned asset, which was common in his Arab society.

5. If limit zakatable assets to category collected by Prophet ( s.a.w ), then the obligation of zakat would be obsolete and against the objective of Shariah as a comprehensive and everlasting law. Majority of scholars decided modern wealth will be zakatable based on the same illah (reasons of ruling) with the classical zakatable wealth. Thus, based on the modern scholar’s ijtihad , zakat is to be paid on 3 modern wealth: Zakat on earned income (Mal Al- Mustafad ) – employment income such as income, salaries and wages Zakat on non-employment income (Mal Al- Mustaghallat ) – exploited asset Zakat on personal wealth – eg : financial securities 1) Salary 2) Rental income 3) Shares

6. 1) Zakat on earned income (Mal Al- Mustafad ) Zakat that is obligated on income derived from jobs performed under the instruction of employers or income derived from self-employment in any permissible activities. Assets or income obtained through all kind of efforts /jobs are considered as wealth that is subject to zakat. Earned income = income received from the crops and fruits when harvested (not fair if only farmers pay zakat but salaryman didn’t have to) “ O you, who believes, give of the good things which you have honourably earned and of the fruits of the earth which We have produced for you” (al- Baqarah : 267)

7. Example of income of mal al- mustafad 1) Employment Income : Salaries, wages, allowance and bonuses Gratuities and gain from an exercise of Employee Shares Option Scheme (ESOS) or any other variation of ESOS Other income received from employer 2) Self employment & professional services Professional consultation fees Commission and residual income Royalties and honorarium Income from seasonal project or services Occasional or one-off cash inflow such as cash from assets refinancing

8. Earned income do not subject to hawl condition and is zakatable on the receipt. Nisab : considered on the basis of yearly gross income (earned income received during the whole year is added together). Due amount of zakat : 2.5 percent from the total net employment income Debts and a minimum standard of living for the income earner and his family are deductible .

9. Deduction allowed

10. Forms of wealth used to produce exchangeable services or goods that are sold for profit without exhausting the exploited assets themselves . Mustaghallat are unzakatable but generate revenue from these assets are zakatable . Example: Livestock rose for milk, wool and meat. The livestock is not zakatable but all by-products from the livestock are zakatable . Rental income from the land, buildings or vehicle. Income from agricultural produce not zakatable under zakat on crops such rubber, palm pil , durian etc. which the trees are nor for sale. Any types of animal rearing which the mothers are not for sale. Zakat on unearned income – exploited assets (Mal Al- Mustaghallat )

11. On the growth of an exploited asset, Zakat is assessed after deductions (taxes, wages, debt, maintenance, etc.) based on its appraised value. Paid at the rate of 2.5 percent. Haul : passage of a Zakat-year does not apply on individual payments received through rent or on income earned. It means that the net earning and value of the asset—even a rental fee that comes in the day before the Zakat-year ends—is calculated and paid on the Zakat due date. The Zakat must be paid on an established annual date in which one pays Zakat on all income. Zakat on unearned income – exploited assets (Mal Al- Mustaghallat )

12. Zakah taken on an assets' income Monthly earned rent and income will be treated like fruits that are collected periodically and then all the collections are added together, which is the opinion of the school of Ahmad. zakah must be calculated on the basis of net income, after deducting expenses and costs such as wages, maintenance, taxes, etc. Additionally, debts that are due to others and personal and family expenses are deductible Zakat on unearned income – exploited assets (Mal Al- Mustaghallat )

13. Some ulama (including Shaykh Yusuf AlQardawi ) analogizing the Zakât of exploited assets to agricultural land (with some modifications). Fixed assets of industrial equipment, plants and machinery, on the grounds that they are not tools of a craftsman, but productive and growing capital. Productive assets can be categorise as: “fixed” (the industrial plants, etc.) mobile (like vehicles or honey producing bees). Agriculture land is Zakat exempt, but the growth of the land (i.e., the crop) is zakatable at the rate of : 10 percent of the net harvest value, if naturally watered, and 5 percent of the harvest profit, if irrigated. Zakat on unearned income – exploited assets (Mal Al- Mustaghallat )

14. Productive exploited assets that are fixed, and fixed industrial assets to the non-irrigated crop Zakât rate (10 percent) “when it is possible to know the net income after deducting costs, as is the case in business corporations.” But if it is difficult to determine net income, then “ Zakât is calculated at the rate of 5 percent of the profit” for the exploited assets that are fixed, and fixed industrial assets. All forms of productive capital that produce profitable investment, even in the agricultural business sector (this is different than family farming), should be treated like exploited and fixed assets (as, say, rented buildings or factories), using the same Zakât criteria and calculation methods. Zakat on unearned income – exploited assets (Mal Al- Mustaghallat )

15. Does a haul have to Pass on All the Income of a Productive Asset Before It Becomes Zakatable ? No, a haul (Zakat-year), profit of productive asset only has to pass on the nisab of productive assets. Opinions say that the haul need NOT elapse over all the wealth before it is zakatable . This is, of course, true for crops, which are due upon harvest, for obvious reasons. Their Zakat comes due on the Zakat maturity date. Like the multi-seasonal harvest of a crop, or mined minerals, the collection of productive assets is multiple (throughout the Zakat-year). Therefore, the Zakat must be paid on the accumulated amount on the Zakat due date. The haul for all of these must elapse on the nisab only. Just like with personal wealth, Zakat is paid on all net income for the Zakat year. It is paid on the Zakat due date for everything that remains with one after basic living expenses for oneself and one’s dependents have been paid out for that year. So a haul DOES NOT HAVE TO ELAPSE on each dollar received.

16. Zakat on financial securities Stocks and shares represent ownership of a certain part of the capital of a corporation. Shareholders will receive return in form of dividend and increase in value of shares. Bonds are certificates of a loan borrowed by a government or municipality from the bondholder. A bond is usually paid back at a future point in time with interest. Evidence of requirement for Zakat on shares and bonds O you who have believed, spend from the good things which you have earned and from that which We have produced for you from the earth. And do not aim toward the defective therefrom, spending [from that] while you would not take it [yourself] except with closed eyes. And know that Allah is Free of need and Praiseworthy.(Al- Baqarah , 267)

17. 4 categories of capital market products Equity (Shares, unit trust, REITs, ETFs etc ) – Equities offer considerable potential for capital growth and are long term risk investments. Ownership of equities will often entitle the investor to a portion of the company’s profits through dividends. Bond and Debenture – Bonds are fixed income securities issued to lenders of long term loans, with a maturity date. They provide returns in the form of fixed periodic payments. Derivatives (options & futures) – Derivatives are financial instruments used to manage one’s exposure to today’s volatile markets. A derivative product’s value depends upon and is derived from an underlying instrument, such as commodities, interest rates, indices or stocks. Structured product – An investment product that obtains its value by reference to the price or value of an underlying reference. Eg : market indices, equities, interest rates, commodities, foreign exchange or a combination of the above.

18. The ruling of zakat on shares and other investment in the capital market (public shares, REITs, ETF, unit trust etc ) is equal to the ruling on the traded goods ( uruf al- tijarah ), regardless whether the objective is for active trading or long term holding. Zakatable value : worth of the portfolio at the end of zakat year ( market value ). Zakat rate is 2.5 percent for the market value of shares at the hawl completion date. Haul is the period of holding the investment portfolio and not the period of holding particular instrument. The shares must be held by the shareholders for one year and exclude any loan for purchasing the shares (if any)-complete ownership. Other deduction that can be made: An estimated liquidation cost of existing portfolio at the haul date (brokerage cost, clearing fee & other related cost) Capital gain and income (i.e. Dividends from Shariah non compliant investments)

19. Sample of Zakat on Exchange traded shares & investment (+) Ordinary and Preference Shares (+) Unit trusts and mutual funds (+) exchange traded funds (ETFs) (+) Real Estate Investment Trusts (REITs) Other exchange traded investment, i.e.: Cash inflow from investment exchange Profit distribution in cash (dividend etc ) Liquidated investment during haul (-) Estimated liquidation cost of existing portfolio at haul date (brokerage cost, clearing fee & other related cost) (-) Shariah non-compliant returns: capital gain, income, dividends etc Value of investment that subject to zakat Zakat : Value of investment that subject to zakat x 2.5 %

20. For actively traded investment: (Market value at the hawl completion date + cash proceed from investment ) x 2.5% Cash proceed from investment portfolio : Capital gain Profit distribution in cash (dividend) Liquidated investment during the haul period

21. Shares from companies that pay zakat – the individual didn’t need to be zakat on the shares Share from companies that did not pay zakat – the individual need to pay zakat based on the percentage of ownership Eg : ABC Sdn Bhd wealth that is zakatable in 2019 was RM10 million. En Kamal shareholding in ABC Sdn Bhd was 15%. Zakat on business income on ABC Sdn Bhd is RM10 million x 2.5% = RM250,000 En . Kamal zakat on share = 15% x RM250,000 = RM37,500

22. Example: 1) Shares for long term holding (keep and owned at the end of haul period) En Ehsan owned 200,00 unit of shares @ RM1 at the end of one full year. Zakat rate is 2.5 % on the market value of the share at the haul date. 200,000 units of shares in x RM 1.00 (market value) = RM 200,000 The zakat is: RM 200,000 x 2.5% = RM5,000.

23. 2) Shares actively traded (purchase and sell)during the haul period 2.5 percent on the net profit of selling the shares (capital gain) Capital gain = value of shares after sold - the cost of purchasing new shares. Eg : Khalis purchase 100,000 unit of shares at RM4 per share. He later sell the shares at RM5 per share. Zakat on shares = net profit x 2.5% The value of shares sold – the cost of purchasing new shares RM500,000 (100,000 x RM5) - RM400,000 (100,000 x RM4) = RM100,000 The zakat is: RM100,000 x 2.5 % = RM2,500

24. Non-listed companies (from Syariah Councils) Difficulties to determine the market value Zakat is calculated based on the dividend received

25. Below are assets owned by Remy and Risteena : Case on Zakat on personal wealth Asset Remy Risteena Saving account 15,000 5,000 Bank Kerjasama Rakyat Malaysia 15,000 Lembaga Tabung Haji 15,000 8,000 EITA Resources Berhad (EITA 5208) shares 6,500 Gas Malaysia Berhad (GMSIA 5209) shares 6,000 CIMB-I DALI Equity Growth 2,000 Sukuk I Malaysia (SIM) 2,000 China Ouhu Winery Holdings Berhad (CNOUHUA 5188) shares (initial investment value) 5,250 GSR 999.9 gold bars 8,500

26. Proposed solution Remy Risteena Saving account 15,000 5,000 Bank Kerjasama Rakyat Malaysia 15,000 Not zalatable Lembaga Tabung Haji 15,000 8,000 Not zakatable EITA Resources Berhad (EITA 5208) shares 6,500 Gas Malaysia Berhad (GMSIA 5209) shares 6,000 CIMB-I DALI Equity Growth 2,000 Sukuk I Malaysia (SIM) 2,000 Not zakatable China Ouhu Winery Holdings Berhad (CNOUHUA 5188) shares (initial investment value) 5,250 GSR 999.9 gold bars 8,500

27. ASSETS VALUE 38,000 11,800 Nisab *85 grams X RM170 per gram 14,450 14,450 Above Nisab ? Yes NO Zakat payable 38,000 x 2.5% = 950 NIL