Zakat on Business

Zakat Calculation based on Working Capital Model

(In reference to *AAOIFI FAS 9 Zakat)
Zakat on Business = Net Current Assets (Current Assets Current Liabilities)
+/- Adjustments x 2.5% x Muslim ownership share

Current Assets
Cash Balance
Bank Balance
Closing stocks
Trade debtors
Prepayments
Other Current Assets
Less Current Liabilities
Trade Creditors
Financial loans
Short-term payable / Dividends payable
Overdraft
Financial/Capital Lease

XX
XX
XX
XX
XX
XX

XXX

XX
XX
XX
XX
XX

Net Current Assets

XXX
XXX

+/- Adjustments
Minus Current Assets
Non-halal factors eg. Interest, gambling,
liquor, non-halal product
Deposit for expenses
Loan receivable
Items that have been paid Zakat, eg. Dividends
Bad debts, obsolete stocks, any substantial
devalued items
Staff fund in Current Assets
Staff loan
Raw stocks/work-in-progress stocks

X
X
X
X
X
X
X
X

Add Current Assets

Donations

Add Current Liabilities

Non operating financial loans
Dividends payable
Overdraft
Financial/ Capital Lease

X
X
X
X

Total Net Assets due for Zakat

x Zakat Rate
x Muslim Ownership share
* Accounting & Auditing Organization for Islamic Financial Institution (AAOIFI)

XX
2.5%

ZAKAT ON BUSINESS

CONDITIONS GOVERNING ZAKAT

The following conditions must apply to the said business before Zakat is made
obligatory.

1. Muslim
Only Muslims need to pay Zakat. Thus in a business company where ownership is
split between a Muslim & non-Muslim, only the Muslims share of the business is
subjected to Zakat.

2. Full Ownership
Zakat is payable only on the shared capital or company shares owned by the
owner and NOT INCUDING any shared capital made up of or company shares
that was purchased by borrowed money.

3. Intention to do business

4. Haul is completed (Minimum Period)

5. Nisab is reached (Minimum Amount)

QUANTUM OF ZAKAT

2.5% on the portion of the assets (business assets) that are subjected to Zakat, upon
completion of haul & nisab

COMPUTATION METHOD (WORKING CAPITAL MODEL)

1. Net Currents Assets:

Ascertain the net current assets of the company concerned.

2. Percentage of Ownership:
Ascertain the percentage of interest in the company owned by Muslim
individuals.

3. Formula:
Zakat Payable =

(Net Current Assets (+/-) *Adjustments Conventional

Bank interest)
x Percentage of Muslim Ownership
x 2.5%

*ADJUSTMENT ITEMS
These are adjustments needed in the current assets and current liabilities.

Items Deducted from Current Assets (-):

i.

Items that are not Zakat obligated

Items such as riba, gambling and liquor are to be withdrawn from the zakat
calculations because they are items or products that are non-permissible i.e.
haram.

ii.

Limited Ownership
Water, telephone, electrical and its similar kinds of deposit shall be deducted as it
does not comply with the requirements of full rights.

iii.

Loan Receivable
The money on loan to a borrower is based on the characteristics of full ownership
that has been transferred to the borrower. The borrower then possesses the full
right & freedom to exploit and manage the loaned financial resources for his own
interest and gain. Thus the borrower is obligated to perform Zakat on the amount
of money loaned and NOT the Company.

iv.

No items are to be paid Zakat for, twice.

The dividend income that has already been deducted for Zakat may be zakat
exempted.

v.

Current Assets must be productive

Bad Debts, expired stocks and depreciation that is permanent should be exempted.

vi.

Charitable Funds
Charitable funds such as khairat and education funds in current assets may be
exempted from Zakat. Nevertheless, charitable funds that are business in nature
such as a Qardhul Hassan loan, the amount exempted from Zakat is the principle
value while funds that are charitable in nature such as donations and khairat, only
the balance amount is exempted.

vii.

Inventory / Stock category

Only the end product is subjected to Zakat. Raw materials or any items in
production are exempted from Zakat.

Items Added to Current Assets (+):

All contributions, donations and alms made by any of the business entity at the end
of haul (the last quarter) shall be added again (with the assumption that the
donations made will not affect the companys liquidity) into the current assets. This is
because any amount channeled for charitable purposes, are still obligatory to Zakat
unless the source is from a charitable fund.

Items Added to Current Liabilities (+):

According to Imam Shafie, there are no debt requirements that pre-determine on
whether the assets are qualified for the nisab or not. Imam Shafies opinion is that
financial loans (not commercial liabilities) do not affect the obligations of Zakat.

Thus adjustments only involve those items that are not deductible such as:

Those not in the form of business operations such as financial loans and the
classifications of scheduled refinance.

Dividends payable

Overdraft

Financial / Capital Lease

To qualify for nisab, the current liabilities that can be deducted are those operational in
nature that includes:
Trade creditors

Operating payables such as salaries, electrical and phone bills

Taxes based on current assessment