DPD30073 Islamic Financial Planning

CHAPTER 4:
ZAKAT AND TAX PLANNING

INTRODUCTIONS TO ZAKAT AND TAX PLANNING

Zakat and taxation system are two important elements in an Islamic financial system. Both are two
distinct concepts which need to be comprehensive understand and appreciated by the Muslims.
Besides is one of the pillars in Islam where it is a compulsory of 2.5% take on the wealth of well-to-do
Muslims as already mentioned in Quran and Sunnah. Meanwhile, the taxation is considered as a
contribution levied on the persons, property or business for the support of the government.

The Meaning of Zakat

Zakat literally means ‘growth’, ‘increase’ or ‘multiply. It is a fixed proportion collected from surplus wealth
and earning of a Muslim. Besides, zakat is to purify Muslim wealth and soul and by paying zakat, the
payer will increase the religious merit and blessing from Allah. It is paid on the net balance after Muslim
has spent on basic necessities such as expenses, financing, donation and taxes. By giving zakat to
right recipient, it will lead to increase of prosperity in this world.

Muslims which on employment and have professional income need to pay when it meets the hawl and
nisaab. Hawl which literally means anniversary is used to denote the assessment period for zakat. Hawl
by definition is one lunar year. Zakat becomes obligatory if the owner has owned the wealth for twelve
(12) lunar months. Nisaab is the minimum amount upon which Zakat is due or the threshold limit. If the
wealth does not meet the minimum amount than the stipulated nisaab, zakat is not obligatory.

Differences between zakat and charity

Charity is an amount of wealth voluntarily paid by a Muslim out of compassion or solidarity with other
members of the society. However, charity is very broad in nature and in all forms of wealth, good deeds,
help, services, and even consolation and sympathy with others.

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Socio-Economic Aspects of Zakat - Distributive Justice.

Zakat institution is an integral part of the Islamic socio-economic system. Distributing the zakat
collection to the poor and needy; including other asnaf are the duties of zakat institution. Zakat officer
which knowns as ‘Amil will assist to identify the qualified recipients of zakat (asnaf). In the Quran, Allah
said:

“Zakah expenditures are only for the poor and for the needy and for those employed to collect [zakah]
and for bringing hearts together [for Islam] and for freeing captives [or slaves] and for those in debt and
for the cause of Allah and for the [stranded] traveler - an obligation [imposed] by Allah. And Allah is
Knowing and Wise.”( at-Taubah, verse 60)

Thus, it is clear that there are eight groups of asnaf which has the rightful toward receiving zakat.

i. Al-Fuqara’ and al-Masakin- Poor and Needy

Poor or al- fuqara’/fakir is the one ho has neither material possession nor means of livelihood;
one who suffers, and has no means to sustain his/her daily needs. Meanwhile, needy or al-
masakin/miskin is refer to the one who has insufficient means of livelihood to meet his/her basic
needs.

ii. ‘Amil- The administrators of zakat

One who is appointed to collect Zakat and the expenses incurred in the administration of Zakat.
They should donate their time for zakat disbursement and do it with honesty and truthfulness.
If they cannot, they should be paid or rewarded for their time.

iii. Mu’allaf- Those Whose Heart Are Made to Incline to Islam

The one whose believe in Islam expected to increase. There are several groups of
people that are qualified as muallaf, such as:People who just become Muslims , People
who or whose groups of family who wish to be Muslims, people who worried to do crime if not
helped.

iv. Riqab- The ransoming of Slaves

Freeing Muslims from the grip of slavery and conquest either in terms of physical or
mental grip such as the grip of ignorance and shackled under the control of certain
people.

v. Gharimin- those who are in debt

Those who are indebted to meet the basic needs for the welfare of themselves, their
dependent families or the community who need immediate settlement and are allowed by
Islamic law.

vi. Fi Sabilillah – for the cause of Allah

Any person or party who engages in a vertical activity or activity, defends and preaches Islam
and its welfare.

vii. Ibn Sabil – those who are stranded during a journey

Any person traveling for purposes approved by sharia from any state or country in need of
assistance.

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THE ADMINISTRATION OF ZAKAT IN MALAYSIA

Zakat Framework and Authorities in Malaysia

Even though, Islam is the official religion in Malaysia, The Federal Government does not have a full
authority in religious affairs. Zakat is the responsibility of the Islam Religious Council (Majlis Agama
Islam Negeri-MAIN) of each state in the country. There are 16 Islamic Councils and each state has its
own religious Administrator Enactment.

This Islamic Religious Council also depend on Islamic Religious Department which is a government
department existing in each state to provide the administrative services and to implement the decisions
of the Council. The Council is mainly policy-making and supervisory body. Each Council reports the
Sultan or the Ruler of each state. The department of Awqaf, Zakat and Hajj (JAWRAH) is under this
council and it is to ensure the planning, coordination and implementation of the policy and program
related to the development of Awqaf, Zakat, Mal and Hajj institutions.

The Roles of Zakat Authorities – Collect and Distribute

The Islam Religious Council (MAIN) and Zakat institution (ZI) therefore can play an important role in
complementing the Government’s poverty eradication effort though its scope is for the poor Muslims
only. Its success would also help to buffer the effects of recession of the economy on the poor through
capacity building and mind-set transformation. MAIN and ZI play essential roles in collecting and
distributing the zakat received from zakat payer. There are several roles can be highlighted;

a) To be a zakat collection agency on behalf of the State Islamic Religious Council

b) Delivering zakat on zakat to the community
c) Ensuring that Muslims who are eligible for zakat pay their zakat

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The Types of Zakat

Zakat can be classified into two main categories which are Zakat al- fitrah and Zakat al-mal. Zakat
al- fitrah is compulsory on every individual Muslim meanwhile Zakat al-mal is zakat on wealth.

a) Zakat al- fitrah

It is obligatory on every individual Muslim except the poor and the needy. Ibn `Umar said: "The
Holy Prophet (peace and blessings of Allah be upon him) enjoined the payment of one Sa'a of
dates or one Sa'a of barley as Zakat al- fitrah on every Muslim, young and old, male and female,
free and slave." (Related by al-Bukhari and Muslim). This includes every Muslim alive from the
evening of the Eid al-Fitri until the Eid prayer the next morning.

The material of the Zakat can be dates, barley, wheat, rice, corn or similar items considered as
basic foods. As is practiced today in most Muslim countries, the amount is equivalent to the
money value of a full meal. Zakat al- fitrah has to be paid by the end of Ramadhan.

b) Zakat al-mal
Zakat al-mal is zakat that is imposed on certain properties and can be paid at any time. Zakat
al-mal must be issued because it is a path of jihad to Allah and Islam.

i. Zakat on Income
Income means all types of wages, remuneration, payments or proceeds earned from
work or efforts undertaken either on a regular basis or once in a while. Allah explains
that all the 'good effort' are obligatory zakat. Therefore, for anyone who makes earning
the salary as a profession, then that is also included in the effort that is obligatory zakat.

ii. Zakat on Business

Business zakat is zakat that must be paid as a result of business property whether
based on manufacturing, mining, fisheries, shipping, supply, agriculture, services or so
on for the purpose of being traded, whether in the form of private business, partnership
business with Muslims or with non-Muslims, business all types of companies,
cooperatives or stock businesses or any other form of businesses.

iii. Zakat on Saving

Money is a liquid property that can be used in exchange, value measurement and
savings. Money in the form of paper, coins or the like is equivalent to gold and silver
as a form of wealth that gives purchasing power. Money deposited in savings accounts,
fixed deposit accounts, current savings, as well as other forms of savings in banks or
any financial institution is obligated to pay zakat if it meets the conditions.

Nisab zakat of the same savings equivalent to the value of 85 grams of gold Zakat is
charged as much as 2.5% on the last remaining amount within a year of savings when
the nisab and haul are sufficient and equal to or more than the nisab. Zakat saving can
be divided in to two categories; Single Saving Account and Multiple Saving Accounts

iv. Zakat on Gold and Silver

Islam sees gold as a symbol of wealth that is valuable and capable of growing. In the
past, gold was used as money in trading. Gold-gold is forged into pieces in the form of
coins (dinars) and is also formed into women's jewelry. Due to the privilege of owning
gold and being a measure of wealth, Islam obligates zakat on gold. As well as the
obligation of zakat on silver remains enshrined and should be fulfilled by Muslims when
fulfilling its conditions.

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Nisab zakat gold is based on the current value of nisab gold 20 mithqal (85 grams) or
silver (595 grams). Jumhur fuqaha has backed the nisab of money to the nisab of gold
(85 grams).

v. Zakat on Share
Shares are money invested in a company or business. For share certificates in a
company listed on the stock market (Example of Bursa Malaysia), it is easier to use as
cash compared to shares in unlisted companies or in cooperatives.

The shareholder is the owner of the company and shares the profits or losses of a
company. The performance of a business can usually be measured through dividends
distributed as well as the price or value of shares as is common in the stock market.

vi. Zakat on Livestock

Zakat on livestock such as camels, cows/cattle, sheep, buffalo and goats is compulsory
when the conditions are perfect. These livestock must be healthy, not cripple and must
not be used to work on paddy field or carry the goods.

vii. Zakat on Crops

All plants and fruits that grow on this earth are a gift of Allah SWT, and come from men.
The majority of scholars remain that the plant is not obligated to pay zakat at all until it
reaches a total of five camel loads (5 wasaq).

Compared to other types of property that require zakat, agricultural zakat is exempted
from the haul stipulation because agricultural produce is collected at the time of harvest
only. Thus the nisab of Agricultural Zakat is 5 Awsuq (equivalent to 363 Malaysian
gantang), and its obligation without having to wait a year (haul).