Where people are shareholders in companies, what is the proper way to calculate their zakah liability? The legal requirement in Pakistan is that wherever a company pays annual dividends to shareholders, it must deduct 2.5 percent of the face value of the shares and send it to the Zakah Department. The market value of the shares is not taken into consideration. Whereas in Saudi Arabia, the basis for calculation is the "net current assets increased by the profit for the respective year." In the first case, should shareholders make their own calculation and make up for any shortfall? May I also ask whether the calculation will be the same for shares bought as long term investment and those held for trading? Is there any difference if the investment is in non-Muslim countries?
Let me first of all make it clear that, like all Islamic duties and obligations, zakah is the responsibility of the individual. Even where the state makes the calculation of a person's liability and deducts zakah at source, that person's responsibility is not discharged until he has made his own calculation and paid out his full liability. The reason for that is quite clear. The state may know a great deal about a person's finances, but the full picture remains the one known to him or her.
The fact remains, however, that no system of government can know the full details of what people own. This is why governments of all countries make it a duty of every individual to fill their tax returns every year. In the case of zakah, the duty is imposed by God and to Him we are accountable for discharging it as best as we can. That means that we have to do our own calculation and pay zakah willingly, in full, as an act of worship because that is what zakah really is. [It is not a tax liability.]
When we approach zakah in this way, we will have nothing similar to the tax evasion or tax avoidance that all governments try to overcome. People will pay their zakah hoping to be rewarded for it. They will also be keen that if there is an error in their calculation then it would be toward paying more, not less, because when they pay more than their liability, God will count that extra amount as voluntary charity and give them a rich reward for it. They will be winning in either case, but the only case where they end up as losers is that when they try deliberately to reduce their liability knowing that they should pay more than they actually do.
Besides, a Muslim knows that whatever he has is actually a gift from God. It is He who gives us whatever we have, and it is He who either increases it or takes it away. Now we know that God says: "When you are grateful (for the bounty I have given you), I will give you increase." The payment of zakah is an aspect of showing our gratitude to God for having given us more than what is sufficient for our needs and having kept us with such a surplus for the past year. That is not a small favor from God and it is only right that we should show our gratitude in the best way God likes, namely, the fulfillment of the financial duty He has made obligatory to all individuals, which is zakah.
There is only one proper way of knowing the zakah liability on the company shares we may be holding. That is by basing our calculation on the real value of these shares. A government may devise a certain system which it thinks fair to all people, but eventually we are responsible for what we should pay. A shareholder is the one who knows the value of his shares best. He may not know their value at a certain point in time, but that is the same as a person not knowing how much he has in his bank account or at home, or not knowing the total value of the goods in his shop. Suppose that he decides to sell his shares for whatever reason, do you think he would give instructions to his bank or to his agent to sell without finding out first the market value of each share and what amount of profit he is likely to make out of such a sale?
Any person who owns company shares must include the shares in his calculation of his assets and the amount of zakah he has to pay. This applies to men and women alike, because the duty of zakah is obligatory to both. It does not matter whether the company in which a person holds shares makes a profit or not, pays dividends or not, or even makes a loss, still the current value of the shares must be entered in a person's calculation of his zakah liability. This is the normal situation for all Muslims.
A person who has any sort of business needs to work out his zakah liability even if, at the end of the year, he finds out that he has made a loss. This is because of the simple fact that, despite his loss, he still owns more than the threshold of zakah. Here we find an essential difference between zakah and tax. When you show that you have made a loss during a particular year, you will not be required to pay income tax. But with zakah, you pay on capital and income. So you may incur a loss and still pay zakah to show your gratitude to God for having given you more than enough to live on.
I would like to emphasize that when calculating zakah liability we take the market value of our shares, not the face or nominal value. There are companies which start with a very low face value of their shares. When they are successful and well established those shares acquire a value which is far in excess of their face value. It is that value for which they are sold on the market on any particular day that represents their real value. It is the value to be taken into account when we want to find out our zakah liability. We add to that any profit we receive from those shares. This applies whether we hold our shares for long-term investments or we trade in shares buying and selling whenever the transaction makes business sense. It also applies whether our shares are in companies that trade in a Muslim country or in international companies.
God Who has given us everything we have has also given us our property whatever form we hold it and wherever in the world it happens to be. Since He has imposed on us a financial act of worship called zakah, we have to fulfill that duty wherever we or our finances happen to be. It may be said that this calculation may be easy for people who hold shares in well-known companies, large or small. However, it is difficult for people who invest in mutual funds or unit trusts. This is because the investment is split into units for fractions of shares of a larger number of companies which may not be known to the investor. It is possible, however, to find out from the company that runs the scheme of unit trusts in which you invest the market value of your investment. Indeed, these companies have to declare the results of their performance on a regular basis. An investor in this type of fund should make a proper effort to determine the value of what he owns and include that in his calculation of zakah. Again, he should try to keep his error on the side of caution, i.e. pay more rather than less, to ensure that he has discharged his liability in full.
• Zakah: Women's jewelry-limit
I understand that each family is allowed 85 grams of gold. However, a middle class Muslim family possesses about 200 grams of gold in jewelry, which is used by the mother and her daughter. They need more for their own use, i.e. for the marriage of the daughter and her brother. What is the practical solution to this problem.
You confuse two separate issues. It is not true that a family is allowed 85 grams of gold. Indeed, any family or woman may have as much gold as she wants. There is no upper ceiling on how much of jewelry a woman may have. The figure of "85 grams of gold" has nothing to do with a woman's jewelry. It is the threshold of zakah, which means that if a person, a man or a woman, owns more than the equivalent of 85 grams of gold, or 634 grams of silver, and after the passage of one year, he still owns more than this basic amount, he is liable to pay zakah on what he has, at the rate of 2.5 percent. Indeed, he need not have any amount of gold whatsoever to become liable to zakah, if he owns more than the equivalent of that amount. All his possessions may be in ordinary currency.
As far as the jewelry used by a woman is concerned, it is exempt from zakah, as long as its amount is considered to be reasonable for women in her social status. A woman who is very rich may have jewelry amounting to much more than the 200 grams owned by this middle class family, and she need not pay a penny in zakah for that jewelry. Another woman may have half as much in jewelry, but that would be much more than reasonable for women in her social status. Therefore, she pays zakah on what is considered to be excessive. This is a totally different matter.
I should explain that in determining if zakah is payable for gold or jewelry, or indeed anything else, we do not take the family as a whole. Every individual has to look after his or her own zakah. For the purposes of zakah, there is no such thing as joint ownership. If something is owned jointly, each partner has to calculate his or her share of that particular item and add it to his or her belongings in order to determine how much zakah he or she should pay out. What we pay in zakah is obviously determined by the relevant rules of zakah. [Added: A woman is not required to pay any zakah for her jewelry provided that two conditions are met: 1. The amount of jewelry she has should be considered reasonable for a woman in her social status; and 2. It is bought for her personal use, not as a means of investment. While some women are very fond of jewelry, the amount they have must not be excessive in order that it be exempt from zakah. As you realize, no exact figure can be given here. What is excessive in one case, may be reasonable, or low in the case of another. It all dependent upon the financial means. On the other hand, if the woman buys jewelry because she hopes to be able to sell it later at a profit, then it is no longer personal ornament.]
• Zakah: Youngsters and their liability
We are three children, the eldest is 15 and the youngest nine. Our parents give us pocket money, but we save some of it. Are we supposed to pay zakah?
Your attitude in trying to know what duties you have to fulfill with regard to your money is highly commendable. Apparently, you have been raised in a religious family. May Allah enable you to grow as good servants of Islam. Zakah is payable by a child of any age, provided that the conditions which make any person a zakah payer are met. A child may be very wealthy, if he has received his property through inheritance or as a gift. His father or guardian is required to ensure that this religious duty is fulfilled. According to some scholars, the role of the guardian is to calculate the zakah which is payable by the child in his care, without paying it. When the child comes of age, his guardian should inform him of how much zakah he is supposed to pay for the years that have passed. It is up to that child, now a grown-up, to pay it or not. Other scholars say that the child's guardian pays the child's zakah liability in the same way as he pays the child's other commitments.
Zakah is payable by every Muslim, man or woman, boy or girl, who owns more than the threshold of zakah, which is equivalent to the value of 634 grams of silver. That is probably in excess of SR. 3000. If your savings is less than that, then you are not liable to pay zakah. If they have reached that amount, you should remember when exactly, or approximately, your savings reach that figure. Next year on the same date, you calculate how much you have. If it is still in excess of the threshold of zakah, then you pay zakah on everything you have, at the rate of 2.5 percent. This is how every Muslim calculates his or her zakah.