Revisiting estimation methods of business zakat and related tax incentives

Abstract

Purpose Available zakat accounting standards as well as the laws governing business zakat suggest that the adjusted net working capital or the adjusted growth capital of a business may be regarded as the base for computation of its zakat liability. The apparent consensus follows from the fiqhi prescription of imposing zakat on urud al-tijarah or the inventory of goods available for trade. Some contemporary scholars however question the rationale underlying this method and argue that the objectives of the Shariah are better met by seeking recourse to alternative methods of zakat determination for business organizations. There is therefore a need to revisit the issues and subject them to fresh scrutiny in terms of economic rationality and consistency. Design/methodology/approach The paper examines the arguments of the “orthodox” school as well as those of some contemporary scholars on alternative methods of computing business zakat. It also undertakes a comprehensive review of the laws of zakat as they are related to businesses and the related accounting pronouncements along with their underlying rationale. As the issue of incentivizing zakat payment is an important one, and it is often linked to provision of tax benefits, the paper examines a few suggestions in this regard. Findings On examination of specific suggestions – specifically, of treating earnings as zakat base – to scrutiny in terms of economic rationality and consistency, the authors argue that the “orthodox” position is not only consistent but also makes enormous economic sense. Further, the issue of incentivizing zakat payment and that of lack of harmonization between business zakat accounting and taxation need not be and should not be resolved by making changes in the former because the same has a sound Shariah basis. It can be easily resolved, if need be, by making changes in methods of taxation (tax deduction or tax rebate) and base them on specific items in the balance sheet or the income statement. Practical implications The paper provides useful insights to policy makers who are concerned about the huge gap between actual and potential collection of zakat and are considering tax reforms for incentivizing business zakat mobilization. It highlights the diversity in practices relating to zakat computation and related taxation across Muslim countries. Originality/value The paper searches for and observes consistency and compatibility between the orthodox Shariah-legal position and several accounting and taxation-related policies relating to business zakat. The policy prescriptions are expected to rejuvenate and strengthen the global zakat sector.

Re-formulation zakat system as tax reduction in Indonesia

“…According to Saudi law, all business entities must register with the Department of Zakat and Income Tax under the Ministry of Finance. 71 Malaysia also gives a tax incentives for individual zakat and tax payers. Therefore, zakat payment attracts full tax rebate.…”

Strengthening Corporate Zakat Policy in Indonesia

“…In many countries zakat law is somewhat general in nature and sets out the specific regulation to be formulated by designated organization (Obaidullah, 2016).…”

“…Hence, the implementation of business zakat in Malaysia, like other religion issues in Malaysia, is the responsibility of each state. As a result, the regulation regarding business zakat displays great diversity (Obaidullah, 2016…”

“…The Indonesian Islamic Banks using profit as basis of the calculation. In contrary, some researchers stated that using profit as basis of corporate zakat assessment is not handling the issue of corporate zakat in a comprehensive manner (Obaidullah, 2016). Obaidullah agree that using current assets as basis of zakat assessment is more rationale.…”

“…The punishment is either a maximum 3 years imprisonment or a maximum 5000 DinarsMeanwhile, in Pakistan zakat has been made compulsory since 1980. In the nature of financial assets zakat was deducted at 2,5% of rate on specified assets(Obaidullah, 2016).Bahrain is the country that fully supports the implementation of business zakat. Bahrain is the founder of The accounting standard setter for Islamic Financial Institution, namely the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI).…”