Zakat, one of the Five Pillars of Islam, is the Arabic term used for purification or growth. People and companies must donate a certain percentage of their wealth to help the less fortunate. This redistribution aims to help those in need by making sure wealth is shared fairly. It also helps cleanse the donor's soul from materialism and selfishness, advocating for social equity and assisting the disadvantaged.
In Islam, Zakat is a yearly required charitable donation based on wealth that exceeds a predetermined level (Nisab). In businesses, Zakat covers investments, earnings, and assets derived from business operations. It seeks to uphold the values of social justice and compassion by purifying wealth and ensuring that the less fortunate are distributed fairly.
Zakat on Business
Companies and businesses are obliged to pay Zakat for their excessive wealth. Excessive wealth must equal or exceed the Nisab threshold of 2.5% of the net wealth or equal to three ounces of gold.
When a company's net assets are determined and exceed this amount, Zakat is obliged to pay annually.
Zakatable assets:
Inventory: All stock in trade is liable for Zakat, such as raw materials and products manufactured for sale.
Receivables: The amount of profit or earnings that remains after all allowable company expenses, such as rent, utilities, salaries, and taxes, have been subtracted is liable for Zakat.
Investments: The market worth of tangible assets, such as property bought for resale, is also liable.
Bank Balances: The business's Cash and bank balances are also subject to Zakat.
Non-Zakatable assets:
Fixed Assets : The building, property, machinery, and vehicles used for business operations are not liable for Zakat.
Debts : Debts that the business needs to pay off within the lunar year are also exempt for business.
How to Calculate Zakat for Business
You can calculate Zakat by simply following these steps:
- Calculate the total value of cash, inventory, receivables, and investments.
- Subtract any debts and liabilities that are due within the year.
- Ensure that the remaining amount meets or exceeds the Nisab.
- Apply the Zakat rate of 2.5% to the net Zakatable assets.
Example of Zakat Calculation
Suppose a business has the following:
- Cash and Bank Balances: £100,000
- Inventory: £60,000
- Receivables: £40,000
- Investments: £20,000
- Debts Payable: £30,000
Total Zakatable Assets: £100,000 + £60,000 + £40,000 + £20,000 = £220,000
Net Zakatable Assets: £220,000 - £30,000 = £90,000
Check Nisab: If the Nisab is £3,000 (current value of 85 grams of gold), the net assets exceed the Nisab.
Zakat Due: 2.5% of £90,000 = £2,250
