1, INTRODUCTION the pillars of Islam other than shahadah (oath), ip (roe in Gs) ao nage) rae Ge prindidals itachi a oes ben eee (rsa) an a of holdings of one year (haw), zakdt must be paid on it This is to share the wealth with other segments of society. Zakat is detined as a determined portion taken from specific wealth and allocated ty those deserving it, by Qur’anic injunctions, “Of their goods, take alns, that so thou mightest purify and sanctify them; and pray on their behalf, jeriy thy prayers are a source of securty for them: And Allah is One Who heareth and knoweth” (al-Tawhah (9): 103), For Muslim individuals, the zakat element is as vital as plannin, for tax in order to perform the compulsory ‘ibadah as Prescribed by the Shariah, as well as, observing their Tesponsibility towards the country. 2. WEALTH SUBJECTED TO Z4KAT There are two types of zakat levied on Muslims. a. Zakat al-Fitr Zakat al-Fitr is due from the starting of Ramadan and ends before the “d al-fitr prayer, b. Zakat on Wealth Zakat on wealth (zakat al-mal) can be classified into: i. Farming (agricultural) produce (e.g. wheat, rice) Livestock (e.g cows, sheep, camel) . Gold and silver iv. Mining and treasure (ma‘ ¥. Business (e.g din, rikiz and kuniiz) sole proprietor, partnershi Savings (including Epp savings) hares vill. Employment income ix. SukitkZakit, applicable to modern Muslim society includes zakat payable on gold and silver, savings, shares and employment income, will be explored further in the chapter. Note that zakat on employment income is considered zakat on wealth notwithstanding the traditional definition of income being different from wealth. ‘The reason for making zakat on employment wajib (compulsory) is derived from the gas of scholars. Employment income is similarly treated as that of wealth created from agricultural activities which is a form of wealth subjected to zakdt. We will not investigate in detail zakat on business income as the main attention of this module is on personal financial planning. In addition to the above, some Islamic scholars also suggest the inclusion of mustaghallat sources in zakét. Mustaghallat sources are fixed properties such as land for agricultural purpose and house or buildings which are not meant for trade. Originally, these properties were not subjected to zakat. However, they are subjected to zakat should there be benefits arising from their renting or leasing. The argument is based on the Qur'anic verse in which Allah the Almighty states: “O ye who believe! Give of the good things which ye have (honourably) earned” (al-Bagarah (2): 267). There are different opinions on the method of zakat calculation on mustaghallat sources: a. Zakét on mustaghalldt wealth has to be treated equivalent to zakat on trade materials. The assets will be evaluated at the end of the hawl, and zakat will only become payable if they meet the nisab. The rate of the zakat is 2.5% and the nisdb is the current value of 85 grams of gold. b. The wealth is deemed as assets which are not subjected to zakat and thus, only the revenue is subjected to zakdt once it is gained and meets the nisab. There is no hawl condition to be met and the Tate of zakat is 2.5%. Cc The assets will be treated as assets which are not subjected to zakat and only the revenue is subjected to zahdi at the rate of 5% or 10% once it is gained. The rate of zakdt in the third method is similar to the rate for agricultural produce. However, it still needs ‘o fulfil the nisab requirement. There is also an opinion suggesting that the actual cost of Taintaining the mustaghallat sources, such as quit rent andassessment, maintenance of the property, be deducted against the revenue before calculating zakat. 2.1 Zakat on Gold and Silver Gold and silver are subjected to zakdt because they have value, For instance, they can be used as money, gifis or souvenirs. I compulsory to pay zakat if gold and silver meet the nisab of 85 grame for gold and 595 grams for silver. It must also meet the hawl. In the Holy Qur‘an, Allah the Almighty indicates that it is compulsory to pay zakat on gold and silver: “...and there are those who bury gold and silver and spend it not in the way of Allah: Announce unto them a most grevious penalty” (al-Tawbah (9): 34). The types of gold and silver items that are subjected to zakdt are: a. Gold and silver items which are not worn b. Gold and silver items which are worn (even once or oc during the haw!) sionally It is also compulsory to pay zakat on gold or silver utensils, decorations, and equipment. The nish and hawl conditions are the same as that of jewellery. Methods of calculating zakd! on gold and silver are as follows: a, Gold and silver items which are not worn even once during the year. Its zakat payable is 2.5% on the current value of gold or silver b. Gold and silver items which are worn are subjected to two conditions: i. If it is less than ‘urf (standard amount of gold or silver oF jewellery worn by people in that area), therefore, it is not subjected to zakat. 4 Iitis more than ‘urf, it is subjected to zakat on the excess of the ‘Surf The zakat is imposed at 2.5% on the difference between the current values of gold or silver less any gem" (diamonds. jade, sapphire, pearls, rubies etc.) attached to the jewellery,39 Zakat on Savings since money is used for business transactions, thus, it is subjected to sat. It has the ‘buying power’ like gold. ‘Money’ means ‘money which is deposited or kept in saving accounts, fixed deposit, current ‘ecounts, shares, unit trust and other kinds of savings’. Zakat on money is imposed if the amount of the lowest balance of the saving meets the minimum quantity (nisab) and it is kept for one sear (complete hawl). The nisab for zakat is the current value of 20 migal of gold which is 85 grams or silver of 595 grams, The rate of uakat is 2.5%. For example, the calculation of zakat on savings based on the amount in Table 8.1 is provided: Table 8.1: Al Wadiah Account Balance of a Client Dates In (RM) Out (RM) Balance (RM) 2/01/07 20,000 25/04/07 2,000 18,000 31/05/07 200 (hibah) 15/07/07 1,500 15/08/07 7,100 | 18/09/07, 4,200 121307 2,000 Additional note: The nisab for the hawl is approximately RM8,500 (85g of gold at RM100 per gram). Included in the lowest balance is RM200 which is hibah (gilt by the banks to the depositor after performing business for a year). Thus, the calculation of zakat is as follows: Period of hawl: 1 Muharram ~ 30 Dhul-Hijjah Nisaib Lowest amount Rate of zakat = Thus, akat on Money/savings RM16,700 x 2.5% = RM 417.50Based on the Shariah, the hibah is permitted and hence, it deducted from the lowest balance amount. Ifa person has multiple savings accounts, a standard haw! accounts has to be determined. The lowest balance from each a will be added up. If the total amount is more than the nisab, money will be imposed. A similar method is also applicable to calculate zakdt on other savings accounts such as, fixed deposit and mudarabah accouns, Zakat on investment in unit trusts is imposed on the value of the investment if it meets the minimum niyab and haul. is not for all count zakat on 2.3 Zakat on Savings in EPF Zakat on savings in Employees Provident Fund (EPF) or any funds similar to it, is imposed if it completes the haw! and meets the minimum nisad. ‘There are three views in calculating zakat on savings from EPF: a. Incomplete Ownership Zakat is only imposed on the retirement day when the saving is retrieved from the EPF or when some money is withdrawn from the EPF accounts, for instance, withdrawal made to buy a house. Zakat is imposed on the whole amount of savings withdrawn from the EPF and the rate on zakat is 2.5%. For example, if the EPF avings is RM100,000, thus the zakat is RM100,000 x 2.5% = RM2,500 b. Complete Ownership Zakat is imposed when it has complete hawl and nisab. Zakil is only imposed on the amount of savings contributed by employees only. Thus, every year zakat is payable on the amou! of contribution by the employees if it meets the haw! and nisi Sten though the money is still in dhe EPF. The rate for zal ® 25%, For example, if the is RM10,000, thus, zakat 2.5% = RM250. : eat employee's contribution during the 8 # at the end of the year is RM10,000 ®¢. Consensus by the Fatwa Council in 1982 According to Imam al-Shafi'i, zakat on similar funds is compulsory for Muslim hawl which is after a year of receipt, oe savings in EPF or any ns once it completes the 9.4 Zakat on Shares According to Dr. Yusuf al-Qaradawi in his Figh al-Zakat, sb tovaluable papers which are traded specifically in trade ance in the shares market”. Zakat on shares will not be imposed if che company which issued the shares has already paid sakat on ie usiness. However, if the company does not pay zakdt on its business, the holder of the shares has to pay zakat on those shares. As for listed Shares, zakdt may be imposed on the dividend received. There are two ways of calculating zak? on shares: a. Shares which are still in hand at the end of the hawl. If the value of shares is lower than the acquisition cost, then, the market value of shares is applied. b. Shares which are traded during the period of the awl. Zakat is imposed on the selling price of shares after deducting the market value. Example 1: Encik Samad has the following information regarding his shares: «still in hand in company Q and the price is RM200,000 Jo = RM5,000 i. 200 lots of shares ar RMI, therefore, the value of shares + Thus, zakat is = RM 200,000 x ii, Shares traded during the year: + Total value of shares sold + RM500,000 - RM400,000 = RM 100,000 a + Thhus, zakdt is = RM100,000 59200 RMS, 0004 RM2500 Total zakat on shares paid by Encik samad is RMD: = RM7,500 quisition cost ili,If the shares are kept for a year, zakat is payable amount: the capital or the lowest value of the shares. If 1 kept up to year, they will be deemed as savings, Shariah non-compliant shares are not subjected to zakat . they are from doubtful sources. i. “If shares are bought through loan, the loan cost will he dec if the shares are traded in a year’s time. If the shares are kept for year, the cost of loan will be deducted from the lowest valut the shares during the year. on the he share aes ar 2.5 Zakat on Islamic Bonds Other than equity-based financial instruments, invest made in debt-based securities such as Islamic bonds. Si part of an individual's before, zakat is not pay ment can be nce bonds are sets, zahdt is payable on them. As explained able on hardm sources; no zakat on bonds that are not Shariah compliant. imposed on bonds, i.e. 2.5%. If the held during the year of zakat Payment, zakdt is payable on its original value plus any profits earned on them. But if they are meant to be waded, then zakat is payable on their current value. The cost of purchase and the financing amount is deductable as in the calculation of zakat on shares. to be levied The same rate of zakat is shares are for investment and 3. ZAKAT ON EMPLOYMENT INCOME Zakét on employment extensiveness, although it Previous section, sTncome’ to zakit means “gains” and this is inclusive of SuPIosment income and income from professional services. Manic stholats such as Prof. Dr. Yasuf al-Qarsdlwet and Prof, Dr, Shaw {smal Shahatah, suggest that employment income and income fo rendering professional services ane among wealth from the musta Our’, from the expansion of the wealth. ‘There is no La Sey USNe not Prophetic tradition pronouncing that aoe vices are compulsory, However, Islamic scholars a that zakat on mustafad sourves ne compulsory based on the following ae on a) sant believe! Give of the good things which ye have (honow™ ‘amet (al-Bagarah (2): 967) ; will be discussed separately due oe falls under zakat on wealth dealt with in theIslamic scholars also agree that zakat on the musta ee ee oie a al afd sources were ated by Caliph “Umar al Khatab, During his pmiere had asked Muslims to pay zakat on lambs born to those sheep which have met the haw! and nisab. The order was imposed even a w ie h 3 newly porn lambs. The discussion on whether zakdt is compulsory on wealth fj y rom ustafad sources has not reached a solid consensus. It is considered rnatter of mukhtalaf fihi (subject to argument). Hence, the Mvgmentaton is up to the authorities (Islamic Religious Council in each state in Malaysia) to determine whether it is compulsory to pay what on employment and professional services. If the Islan Religious Council in a state decides that it is compulsory to pay zakat on income from employment and professional services, then the yople in that state who receive income from the said sources have to abide by the decision. At the national level, the National Fatwa Committee Conference (Special) which was held on 22"4 June 1997, agreed that zakat on salary is compulsory for those who qualify (met the haw! and nisab).! 3.1 Types of Income Subjected to Zakat a. Employment income which is subjected to zakat refers to: + Annual salary * Deferred salary + Various allowances (related to employment) * Others (e.g. bonus or any other income w) considered as income related to employment) hich could be b. Income from professional services Income from undertaking tasks or rendering professional services (e.g consultants) 32 Conditions of Zakat to be Compulsory and professional income Tis compulsory to pay zakat on employment ifthe following conditions are met:+ The individual is a Muslim + Full Ownership + Income/gains in nature + Complete nisab (the amount differs from each state) + Complete haw! 3.3 The Nisab, Rate and Hawl ‘The nisab of zakat on employment income and profession; based on zakat on gold. Thus, the nisad is equal to the current value 85 grams of gold. The tate of anhat on employment income sit professional services is based on zakat from mustafad sources which 7 2.5% from the net income. The rate is 2.5% because the Source is in the form of cash (nugid) and itis not in the form of ‘ayn (in-kind) Since the employment and professional income fall under -aig from mustafid sources, the nisab is calculated before determining the commencement of hawl. Ifthe nisab is already fulfilled, only then vil calculations be started on the hawl. Priority should be given to the nisad rather than the hawl. For instance, for one who starts working in January, one’s income will only meet the nisab in October; thus, the hawl will be calculated starting from October until the next 12 lunar months (gamariyyah). Zakat could be paid prior to the haw! since it will not affect the amount of zakat that has to be paid as long as the income is not less than the nisdb in a year. This approach is known as tagdim or ta‘jil al-zakat. al Services jg 3.4 Methods of Calculating Zakat on Income There are two approaches in determining the amount of =4hi payable: Approach 1: Multiply the rate of 2.5% on gross income for that respective year. Approach 2: Multiply the rate with the income chargeable to os after deducting allowable expenses. ‘The allowable expenses defined according to the decisions made by the respective Islam” Religious Councils, For instance, Pusat Pungutan Zakat Slang adopts the guidelines on personal reliefs from the Inland ae re Board as the basis to deduct expenses. The deduction could be on the basic needs or the actual amount of expenses incurred.3.5 Deductible Expenses i. Basic needs (e.g. food, clothi i ii, Allowable eae aire Se ae nace etal oxneres) + Self RM8,000 + Spouse- RM3,000 + Children (unlimited)- RM1,000 each . foes mie amount contributed to parents . thers under the responsil zakat-pa i a eee ibility of zakdt-payer (e.g. siblings, + Payments made to institutions that pay zakdt (e.g. monthly savings deduction to Tabung Haji) + Payment made to Employees Provident Fund (EPF). Money contributed to EPF is considered “fully-owned” since the employee will only receive the money after retirement. 4, CALCULATION OF TAX ON INCOME 4.1 Income Chargeable to Tax sian Income Tax is specified under Section 3 “Subject to and in accordance with all be charged for each accruing in or from outside The scope of the Male of the Income Tax Act 1967 as this act, a tax to be known as Income Tax shi nt upon the income of any person year of assessme sia or received in Malay derived from Mal: Malaysia”. Income Tax Act 1967, in Section income that are chargeable to tax. They are: 4 explains six headings of + Section 4 (a): Gains or profit from a business for whatever period of time carried on. + Section 4 (b): Gain + Section 4 (c): Dividends, interests ar * Section 4 (d): Rents, royalties or premiums oe : * Section 4 (e): Pensions, annuities, or other periodical payments i of the foregoing paragraphs. : aie | ts, Gaintee Teg under any of the foregoing paragraphs. s or profit from employments. nd discounts. profits not fal4.2 Sample of Tax Computation on Income For married individuals, they are given the their tax returns separately on jointly illustrates both situations for a couple, Yacob and Shima { of Assessment 2008. JOINT Income from Employment | 222,000 Allowances 14,400 Rental 000 Bonus 15,000 260,400 Less : Relief srsonal 8,000 3,000 Children 5,000 Books (max: 1000) 500 Medical self, spouse, kids Life Ins & EPF 6,000, Education & Med Insurance 22,500 237,900 CHARGEABLE INCOME, Tax on first 150000 Next 27% | | 51,708 | less Zakdt Rebate (8,475) | Tax payable 43, The full lists of relief can be referred to in the sell TAX RETURN FOR YAI FOR YEAR OF ASSESSMENT 235 27,975 | 100,000 option wher her to § : to The followin, - 1B examph for the Vear DFAT SEPARATE YACOB SHIMA 180,000 2000 14,400 9,000 ___15,000 204,000 56,400 8,000 8,000, 5,000 500 6,000 19,500 8,000. 7 48,400 14,475 35,000 15: 7% 13% _L7: . 3,267 (3,600) (333) assessment forms available on the net at www.lhdn.com.my. 4.3 Relationship between Tax and Zakat for Individuals The first incentive is on the Schedular Tax Deduction (STD) Pa", which is imposed on those salaried individuals who ™ minimum criteria stipulated by the Income " from January 2000 an employed individual who deducts his employment income on a monthly basis and at the sa ent nee 7, Effective ct 1967. Blealso subjected to STD payment by the IRB could request from the employer to deduct the amount of monthly zakat from the STD. Therefore, the amount of STD remitted to the IRB i after deducting the zakat paid. If the amount of zakat monthly basis is more than or e is no STD remitted to the IRB. ‘The amount of zakat paid is entitled to be claimed as rebates pursuant to Section 6A (3) of the Income Tax Act 1967. In addition to that, any payment due which is related to Islamic religious purposes such as zakat al-fitr is also entitled to rebates under the same section. However, if the amount of zakdt paid is more than the final tax due, no refund will be granted by the IRB. the net amount deducted on a ‘qual to the amount of STD, thus there PLANNING ISSUES IN ZAKAT AND TAX Tax planning are planning schemes of tax affairs by the taxpayers or the company with the objectives of minimising current or future tax obligations. In general, tax planning involves efforts in reducing the overall tax rate and to take advantage of the tax exempt provisions in the Income Tax Act 1967. Tax planning is referred to as tax avoidance activities that involve looking for loopholes and weaknesses in the Act and some specific tax provisions to the advantage of taxpayers, This is different from tax evasion which amounts to cheating and misleading the tax authorities thus, rendering the taxpayers involved liable to tax evasion practices punishable under the Act. There are two elements of tax planning: a) to take advantage of all deductions and exemptions available and allowable under the act to plan the right timing to make economic decision so that maximum deductions and exemptions may be utilised in an efficient manner b) Several strategies normally employed in tax planning activities are: a) To shift income or profit between assessment years -normally forward. b) To change the nature of income or profit from taxable to exempt. 9 To take advantage of incentives and concession in tax prov to reduce tax obligations. ‘ions@) To take advantage of the privileges provided to certain { To tal jes’ from the viewpoint of taxation; for example, whet. rm a sole proprietorship or a limited company Te reether Ice tax, to for several tax ‘entities’ to red, ce ©) To split income or profit between effective rate. f) To even out effective tax rate between entities by shifting in or expenses between entities. This is usually done by comy sed having sets of subsidiaries under a holding company, ee individuals shifting expenses to the spouse whose income is low ver in order to enjoy a lower tax bracket.