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What is Zakat in Islam?

Zakat is one of the five pillars of Islam and is considered "wajib", or a must for Muslims. Zakat
is a compulsory payment for charity by Muslims only, and is calculated from their acquired
wealth, or income. In Malaysia, zakat falls under the state legislation and each state has different
rates and methods of calculation to determine the zakat amount that muslims have to pay.

Zakat from the perspective of the Islamic law

An obligation for Muslims to fulfill


The 3rd from the 5 pillars in Islam
Its importance is no different from the other obligations
Mentioned in the Holy Al-Quran vis--vis with prayers in 30 verses
The hadith also emphasized on the importance of paying zakat
Always perceived as an act of worship that has important effects in the society

The history of zakat payments

Prior to Hijrah, zakat is only compulsory to those wealthy people who are close with the

Prophet s.a.w.
At that time, the obligation to pay zakat is based only on their awareness, willingness,

discretion.
An organized system of zakat (for instance having the conditions for nisab, rate and
haul ) was only applied after the 2nd year of Hijrah.

The main aims of zakat

Our worship to Allah for all His bounties to mankind

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Al-Baqarah: 267 Oh ye believe! Give of the good things which ye have (honourably

earned). And of the fruits of the earth which we have produced for you..
Assist the poor and the needy
- Al-Dzariyat: 19 and their wealth and possessions (was remembered) the right of the

(needy).. and act as a mechanism to distribute wealth


Purify ones heart and self from being stingy
- Al-Tawbah: 103 Of their goods take alms. That so thou mightest purify and sanctify
them..

Conditions of Zakat (and some definitions)

Not all Muslims are required to pay their zakat, depending on wealth and income. Just like
income tax, zakat is obligatory only after someone reached a certain amount of wealth, among
other things
Muslims

Only those who are Muslims have to pay both their yearly Zakat on Wealth and Zakat Fitrah.

Nisab

What is Nisab?

Nisab is the minimum amount of wealth that must be owned by a muslim before he/she is
obligated for zakat. It also acts as a measurement that determines the obligation for paying zakat
for muslims. As an example, the nisab in Selangor is RM14,065.00 (according to Lemabag Zakat
Selangor). So if you're living in Selangor and your zakatable income is more than RM14,065.00,
then you have to pay your zakat!

Nisab Amount for Zakat


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In general, the nisab for zakat on wealth is equivalent to the price of 85 grams of gold.
Nisab Amount for Zakat in Malaysia

In practise, the nisab amount in Malaysia is between RM13,000 to RM15,000 depending on


which state people live in. Below shows the price of 85 grams of gold in each state in Malaysia :
State

Nisab Rate 2014

Kedah

RM11,909.35

Perlis

RM11,761.37

Kelantan

RM13,900.00

Terengganu

RM14,119.18

Penang

RM12,000.00

Perak

RM11,988.94

Melaka

RM12,220.87

Pahang

RM11,761.37

Negeri Sembilan

RM12,564.00

Kuala Lumpur

RM12,223.00

Selangor

RM11,650.00

Johor

RM11,76137.44

Sabah

RM13,400.00

Sarawak

RM14,000.00

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Beneficiaries Of Zakat

Unlike taxes, zakat is divided and given to those who are in need, and they fall into these
categories:

Fakir or the needy


Fakir here is classified as those with income less than 50 percent of daily needs. For example,
Hassan has dependents, but only earns a mere RM10 a month. Based on the situation, Hassan
could be considered a Fakir and can apply for a portion of Zakat to help ease his financial
burdens.

Miskin or Poor
Miskin here is one leg up from fakir, and is classified as those who have just a sufficient amount
of wealth to finance very, very basic needs.

Muallaf or A Converted Person


Individuals who convert to Islam can apply for a portion of zakat should they need it.

Fisabillah
Zakat can be given for activities to defend and strengthen the Islam studies (eg: Mosque
repairments, Islamic classes, etc).

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Gharmin
Gharmin are does who suffered many debts but are unable to settle them.

Riqab
Almost non-existent in this day and age, but a riqab is a title given to newly released slaves.
Zakat Type 1: Zakat Fitrah (a small levy)

Basically, Zakat Fitrah is like a small levy imposed on each Muslim and MUST be paid every
year without fail, regardless of your age, income, or wealth. The amount of Zakat Fitrah levied
defers from state to state here in Malaysia.
How do the authorities determined the price of Zakat Fitrah?

In the olden days, Zakat Fitrah is paid using a pack of rice grains (one pack = equals to ~2.7 kg).
But today, the yearly rate is determined by the equivalent price of this rice grains (eg : Zakat
Fitrah rate for Selangor in 2012 is RM7.00). Interestingly enough, states like Johor and
Terengganu has several Zakat Fitrah tiers, and this tier is based on the rice quality that the zakat
payer consumed. So if you consume grains with a lower grade (15% crushed local super rice
grains that sells for RM1.80 per kg) then zakat Fitrah will be cheaper.
Negeri
Kelantan
Terengganu

Kadar Zakat Fitrah


RM7.00
RM4.50, RM7.00 & RM7.60*

Pahang

RM7.00

Perlis

RM6.50

Kedah

RM7.00

Pulau Pinang

RM7.00

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Perak

RM7.00

Selangor

RM7.00

Negeri Sembilan

RM6.50

Melaka

RM6.70

Johor

RM5.00 & RM8.00*

Sarawak

RM7.00

Sabah

RM7.00

Wilayah Persekutuan Kuala Lumpur,


Putrajaya and Labuan

RM7.00

When to Pay
Muslims have to perform Zakat Fitrah during the Ramadhan Month of each year.

How to Pay

The most traditional way is to pay by hand to the Amil (the person responsible for collecting
zakat) at the local mosque (some zakat institutions will set up zakat-collecting booths at
shopping complexes and even bazaars too).
Zakat on Business

Zakat on Business basically means performing zakat based on your business earnings. The term
"business" here refers to any type of business like manufacturing, mining, fishing, shipping,
supplying, agriculture, services and others that are done as a private venture, a partnership
between Muslims or non-Muslims, or business for all types of companies, cooperatives or shares
and the like.
Hadith from Rasulullah s.a.w as narrated by Abu Daud indeed, Rasulullah s.a.w asked us to
pay zakat from the property that we prepare to sell
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All kind of businesses owned by Muslims are subject to zakat

There are two methods on calculating zakat on business :


The Growth Model Method
This method takes into account of the owner's equity of the business entities and financing
sources and some adjustments will be taken into account as well (either to be added or deducted
from the zakatable amount). In other words :
Profit + Capital Owner's Equities + Long Term Liability - Permanent Asset - Non-Current Asset
+/- Adjustments = Zakatable Amount

The Working Capital Method


This method takes into consideration of the current assets of the business, and minus that with
the current liabilities of the business. Like the other method, some adjustments will be also taken
out or added into the calculation. The formula :
Current Assets - Current Liability +/- Adjustments = Zakatable Amount

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Adjustments
Adjustments for both of the methods are based on the items below :
Halal Assets Only
Items that are considered "haram" (business profits that were derived from "riba", gambling, or
from any alcoholic beverages ) must be deducted when calculating the current assets.
Not Fully Owned

Payments for water, telephone, electricity and the likes must also be removed from the current
asset because these items are not wholly owned by the payer (it is actually owned by the
companies that supplied these necessities eg. TM)
Productive

The assets must have growth potential : Items like old stocks and bad debts should not be
included in the calculation.
Donations and Charity Funds

Funds set up for charity purposes will be exempted from zakat.

Corporate Zakat Fatwa on Business


The fatwa committee of the National Council for Islamic Affairs, Malaysia in their 31st sitting on
9th Dec 1992 discussed the zakat on companies and ruled that businesses are required to pay
zakat when these following conditions are sufficient with respect to the business:

Owned by a Muslim

Possessed by a free, independent Muslim

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Wholly or Exclusively owned

Nisab is reached

Completion of Haul

In the case of the company that is jointly owned by Muslims and Non-Muslims, zakat is only
mandatory on the total shares that are owned by Muslims, based on the Net Income earned

Comparison between Zakat and Tax

Business Zakat Computation


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1. Currently there are 3 methods of computing business zakat;


Incomplete record (for small businesses),
Working capital and
Capital growth.

Factors Influencing the Obediency of Business Zakat


1. Attitude

Attitude towards zakat institutions

Understood more about zakat on self and zakat on income

Lesser understanding about zakat on business especially on mode of assessment.

Assumption that once tax has been paid thus payment of zakat is completed.

2. Company

Fundamental issues: Why must I pay zakat?

No provision in the account ( Deemed CSR as Zakat)

Burden in bearing expenses

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Importance of making profit. If there is no profit, no zakat payment.

Perception on distribution of zakat funds

3. Legislation

No Act of Parliament on zakat as compared to Act of Tax.

Decision by Syariah Panel Committee on company

No law enforcement at Federal and State Level

Zakat Exemption

Non Productive fixed assests

Productive fix assests

Non current assets

Funds in the business for charity exempt zakah

Net Result is zakah has done receipts

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No illegal proceeds will be zakah

Operating current liabilities only

Credit scheme member

Issues and challenges in Business Zakat

1. Zakat Determination Accounts


Relies on accounts prepared based on historical ( balance sheet ) method rather the
desired current value method. Management account usually not ready to warrant timely
determination of zakat.
2. Difficulty in Determining Ownership Proportion
Insufficient information to determine full ownership of assets of the company
3. Adjustments for Tax Planning/Minimisation
Tax payers are unwilling to pay higher tax, higher tendency for accounts adjustment
4. Time constraint impacting compliance
Inputting data as per the formula of the Majlis FATWA. Payers of zakat also lack
Knowledge on zakat determination and need assistance.

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5. Zakat Collection
Business entity tend to ignore zakat as the rebate given by IRBM is only 2.5 % from
aggregate income and for the most of the business their management account usually is
not ready. Apart from that theres no enforcement to give penalty for zakat evasion for the
business defaulting zakat payment.

Recommendations

Tax Adjustments and Business Zakat


2.5% tax deduction from aggregate income given by IRB Malaysia is actually very minimal and
a burden to the Muslim entrepreneur. Payment of Business Zakat should be given tax rebate
instead of tax deduction or increase it to 10% tax rebate on aggregate income. This policy will
certainly attract companies to pay zakat on business. From this perspective it shows that the
Government plays an important role and responsible for development of Islam

Roles of company , government and Authorities in increasing zakat for business

Company
Cooperation and responsibility of all and every individual person as owner of company,
management and Board of Directors (BOD) to assume the role in executing his responsibility to
pay business zakat.

Government
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The role of Federal and State Governments to make it compulsory for all companies involving
Business Institutions, GLC and State government subsidiaries to implement business zakat (Act
of Parliament & Enactment).

Authorities
Bank Negara Malaysia (BNM) and Commissioner for Cooperative Malaysia (SKM) can play
their role by relaying wider information on the responsibility of paying business zakat amongst
companies, Islamic Financial Institutions (IFI) and Cooperative.

The Way Forward


Zakat Audit & Investigation

Lessons from Saudi Arabia

Zakatable companies are required to file their zakat returns to the Department of Zakat & Income
Tax (DZIT) during the first month of the year following the zakat year. The DZIT will then
review or audit data filed by the companies and the DZIT will then review or audit data filed by
the companies and will inform the zakatpayer (companies) of the amount zakat payable.
A zakatpayer may object to the amount of zakat within 15 days of the receipt date by a
registered-mailed memorandum stating reasons for objection. Otherwise, zakatpayer loses the
right to object and is required to pay the amount as stated in the received notice.
An example is the case of Al Rajhi Bank. The zakat assessments for the years through 1997 have
been finalized with the Department of Zakat & Income Tax (DZIT). The finalized with the
Department of Zakat & Income Tax (DZIT). The DZIT issued assessments for the years 1998
through 2006, which were appealed by the Bank.
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The Bank submitted the zakat assessment for the years from 2007 till 2010 and paid the zakat
due accordingly. The DZIT did not yet issue the final zakat assessments for these years. (Al Rajhi
Bank, Annual Report 2011, Note 22)

Enforcement
Lessons from Saudi Arabia- penalties for zakat evasion

Maximum Penalties
- Freezing of company accounts
- Owners ban from travel
Lesser Penalties
- Suspension of government transactions with the company
- Company cannot bid for government project
- Company cannot collect money owed by the government
- Company will not be issued work visas
- Company cannot renew business license

Zakat evaders in Malaysia should be penalize / punished for instance in Selangor


-

The Majlis should exercise its power to create penalties and provide punishments for
matters in relation to the collection and provide punishments for matters in relation to
the collection and delivery of all proceeds of zakat and fitrah. (S.87, Enactment No. 1,

Administration Of The Religion Of Islam (State Of Selangor) Enactment 2003)


IRB should treat zakat as the similar way as tax.

Others

Move towards fair / current value accounting


Encourage proper book-keeping
Provide zakat incentives

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Business zakat payment should be given 100% full rebate instead of the 2.5% on the

aggregate income or the rebate be increased to 10% of aggregate income.


Back duty zakat : for zakat recovery
The procedures of zakat payment need to be simplified.
Awareness of zakat as the 3rd pillar of islam needs to be more aggressive and productive.

Conclusion
The extent of observation in the execution of business zakat in the Federal Territory and in
general Malaysia is at the low level. There is room for improvement especially in the
case of state Zakat Institutions by way of marketing, promotion, providing understanding of
business zakat. The need for a National Zakat Act as a compliment to State Zakat Enactment for
business zakat. The effort to secure tax rebate from corporate tax should be enhanced in order to
reduce the burden currently borne by business institution

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REFERENCES

http://salihin.com.my/Zakat-Practice-and-Sharing-of-Experience-How-Do-We-Do-It.pdf
http://www.irti.org/English/Research/Documents/PP-1435-03.pdf
http://www.mia.org.my/new/downloads/nbzs/2013/02-Business-Zakat-Compliance-&-PracticesIn-Federal-Territory-Article.pdf
Wahab A. Norazlina & Abdul R.R.A. (2013) Determinants of efficiency of Zakat Institutions in
Malaysia : A non-parametric approach. Asian Journal of Business Accounting 6 (2)

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