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Query Answered: Company Shares, Zakāh, Kunūz, Tax

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Q 1: In a construction company dealing with real estate or machine tools, a shareholder, as you explained, is exempt from Zakāh. The cash value of his shares is part of the total value of assets in the joint-stock company. Why then must a shareholder pay Zakāh on the value of his share?

A: The shareholder of a joint-stock company with shares worth Nisȃb, is Sȃhib al – Nisȃb. However, he will not pay Zakāh individually. Every shareholder’s assets worth Nisȃb are calculated jointly, after excluding factors of production but including business goods and cash balance at year-end.

Q 2: Zakāh on business shares presupposes the existence of an Islamic government and a central mechanism for Zakāh collection. But how to collect Zakāh without such mechanism?

A: Zakāh on business shares is calculated from a total of business assets plus cash balance at year-end. Then 2.5 percent is paid from the total. The same rule applies to Zakatable shares held in one or more joint-stock companies, after assessing the market value of those shares at year-end.

Q 3: Justice demands that capital invested as shares in a joint-stock venture is liable for Zakāh only once. A shareholder is exempt from Zakāh, as it is deducted collectively by the company after excluding shareholders who are not Sȃhib al – Nisȃb and those who purchased shares in the middle of the year. This is a difficult proposition. It is not easy to ascertain if a shareholder with a value of assets below Nisab in the company does not own assets elsewhere that makes him Sȃhib al – Nisȃb. Furthermore, the economic fallout from deducting Zakāh from an individual’s personal holdings and shares will be entirely different from that caused by collective deductions. In the latter case, the management of a joint venture is likely to take annual Zakāh deductions as part of the company’s total outlay, and will accordingly raise the price of its product to cover that amount because it may be difficult to pay the full amount of Zakāh from the company’s profits alone; alternatively, it may not leave enough in balance to pay dividends to its shareholders. If individual shareholders pay their Zakāh themselves, it will not affect the product’s price level. You also say that items which are rented are eligible for Zakāh. Then there should be Zakāh on the value of vehicles used for rental. Similarly, a person owning houses and shops for rent should not pay Zakāh on their value. But, not aware of any such precedent in the past?

A: When Zakāh is paid by a private firm collectively, the shareholder is not required to pay Zakāh separately on his share. It is therefore incumbent on the shareholders to disclose full information to their company. In addition, the government Zakāh collectors should be vigilant of a joint-stock company attempting to include Zakāh outlay in its total expenditure and increase the cost of its products to cover this amount. Furthermore, no Muslim company is expected to indulge in such fraudulent practice. As for Zakāh on items for rent, it is deducted from the rental profits. There is no Zakāh on tools and furniture. As for rental houses, I find no precedence of Zakāh charged on them.

Zakāh’s applicability in Mushārakah and Mudārabah

Q 1: Two persons start a business, with one partner investing both capital and labor and the other contributing labor. They decide to divide the profit into three equal parts: one for the capital, and the remaining two equally distributed for their labor. Views on following.

a. If Zakāh is assessed collectively on the total value of the business, and partner 2 objects and says partner 1 is the sole owner of the venture’s capital, he earns a profit and is therefore solely responsible for Zakāh payment. Is this objection valid?

b. Every business venture has profit and loss. However, Zakāh is concerned with the value of capital. In case of loss, one-third of Zakāh’s amount payable on the share of partner 2 is still deducted from his next year’s profit. For Partner 1, Zakāh becomes a tax on his capital. Such a proposition is contrary to the very objectives of Zakāh?

A: Respond to queries are as follows.

a. The objection of partner 2 is incorrect. Zakāh is deducted from the total business value, then the profit is divided between the two partners with the proportion mutually agreed.

b. The profitability of the venture above is based on capital and labor. Thus, two-thirds of the total Zakāh is payable by partner 1, and one-third by partner 2.

Prescribed Minimum Limit for Kunūz (Gold and Silver)

Q 1: The Nisab prescribed for silver is 200 Dirhams and for gold is 20 Dinars. Some religious scholars are of the view that a person in possession of gold and silver of less quantity than the minimum prescribed limit of Nisȃb, should assess the worth of his gold with the silver, or vice versa, and whichever is found to add up to the Nisȃb value should form the basis of his calculation of Zakāh. This sounds reasonable. Taking silver as the basic metal for calculating Zakāh for silver, and gold for gold is questionable. This is because a person meeting the Nisȃb of silver is required to pay Zakāh while another richer person with no Nisȃb of gold is exempt from Zakāh. The values of gold and silver in the past and now are not different. The Qur’an has determined the Nisȃb of Kunūz based on silver. Hence the value of gold for Zakāh should be assessed based on silver.

A: Disagreement with proposition because of the large difference in the proportionate value of gold and silver at every current time, silver should be the basis for Nisȃb of kunūz (gold and silver) due to the following.

  • The Law-giver has given separate injunctions regarding these precious metals and there is nothing to suggest that either silver or gold should be the standard metal for the other.
  • The reason that something is apparently more beneficial for the poor also does not provide firm ground on which an amendment could be sought to a confirmed decree.
  • The values of gold and silver are subject to frequent change. To ignore their fixed specific quantities for Nisȃb in favour of their ever-changing values and the market rates will harm the permanence of the Shari’ah injunction and cause practical problems for people.
  • The problem mentioned with reference to gold and silver may also arise in the cases of livestock where there are big fluctuations in the proportionate value of their market rates.
  • The best course is to strictly follow, in letter and spirit, the Nisȃb, determined by the Law-giver.

The Difference between Zakāh and Tax

Q 1: Is it correct to impose Zakāh on the rich who pay taxes, including income tax?

A: Zakāh is not a tax, but an act of worship, and one of the pillars of Islam. Since the Islamic government cannot exempt its functionaries from praying regularly on the plea that they already perform duties for the state, the rich cannot be absolved from paying Zakāh because they pay tax.

Q 2: Is it permissible to levy income tax over and above Zakāh? Is it permitted by the Shari’ah to levy income tax on people over and above Zakāh?

A: Yes. An Islamic state is entitled to generate its revenue through income tax and other taxes, in addition to keeping in place, a proper mechanism for the collection and distribution of Zakāh.

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