What is zakat?
Zakat is one of the five pillars of Islam. It requires Muslims whose wealth exceeds the nisab (a minimum threshold, traditionally linked to the value of gold or silver) for a full lunar year to give a portion to specified categories of recipients, such as the poor and those in debt.
Zakat for businesses
Zakat is generally calculated on zakatable assets, which commonly include:
- Cash and bank balances
- Trade receivables expected to be collected
- Inventory held for sale
Long-term assets used in the business, such as equipment and buildings, are generally excluded. Short-term liabilities may be deducted. Methods differ between schools of thought and jurisdictions, so many businesses follow guidance from scholars or regulators.
Rate
The standard rate is 2.5% of the zakat base for a lunar year (about 2.577% if using a Gregorian year).
Mandatory zakat on businesses
In Saudi Arabia, companies owned by Saudi and GCC nationals pay zakat to the Zakat, Tax and Customs Authority (ZATCA), while foreign-owned shares pay corporate income tax. Several other countries collect zakat voluntarily or through state funds.
Accounting
Where zakat is a legal obligation, it is usually recorded as an expense and a liability, similar to income tax. Accounting guidance for Islamic financial institutions is issued by AAOIFI.