Keywords

Introduction

Islamic economic principles propagate socio-economic justice, poverty eradication and equitablewealth distribution. Yet there are many Muslims who are living in poverty, deprived of their basic needs. Many are facing exacerbated hardships due to prolong armed conflicts in their home countries that have resulted in their internal displacement or in becoming refugees in other countries. Hence, there is an urgent need to find sources of funding to provide them with food, shelter, healthcare, education and other essentials of life. The World Bank (2018) and Pew Research Center (2015) data show that three-fourths of the world’s Muslim population are living in low-income and lower-middle-income economies. It is estimated that 11% of the world’s Muslim population reside in low-income economies, 65% in lower-middle-income economies, 20% in upper-middle-income economies, and a mere 4% in high-income economies. The economic state of the Muslim population worsens during times of financial and political turbulence. According to the statistics of the United Nations High Commissioner for Refugees (UNHCR, 2017), it is estimated that six Muslim majority countries together host nearly nine million refugees. These countries are Turkey, Pakistan, Lebanon, Iran, Bangladesh and Sudan. The bulk of these refugees also come from Muslim majority countries or are Muslim minorities. For instance, more than half of the world refugees are from Syria, Afghanistan, Myanmar (Rohingya) and Somalia. In this regard, zakat can act as a major source of funding in addressing the pressing needs of this large and increasing number of people. While Muslims are primarily targeted as beneficiaries of zakat distribution, people of other faiths may also benefit from it.

Zakat is one of the five pillars of Islam. It is a mandatory financial obligation on every Muslim who meets certain wealth requirements. While the Shariah rule is explicit on Muslim individuals to remit zakat, it is herein argued that the zakat obligation ought to be extended to legal persons like corporate entities. The implication is enormous as zakat collection can be amplified if corporate entities are included as payers of zakat, either as separate legal entities or on behalf of their Muslim shareholders. The credibility of the argument above is substantiated by the fact that Islamic financial institutions (IFIs) in several jurisdictions are currently paying zakat. However, unlike IFIs, the other corporate entities do not have human resources or facilities to calculate zakat. Thus, an easy-to-use zakat calculation software could save the entities from this limitation. Against this backdrop, this chapter aims to highlight the need for zakat calculation software for corporate entities and accordingly proposes a model for developing such software.

Literature Review

Organized Efforts to Collect and Distribute Zakat

There have been numerous initiatives to manage zakat through formal channels. Several countries have established specific institutions to collect and distribute zakat. Many non-government institutions have also been set up for this purpose. Every year Muslims around the world contribute tens of billions of dollars as zakat through these formal channels (Bremer, 2013; UNHCR, 2019). However, this represents only a fraction of the total zakat contribution as many donors still prefer to pay their zakat through informal channels.

Kashif, Jamal and Rehman (2018) found that direct payment of zakat to beneficiaries has intrinsic satisfaction for the donor. However, lack of trust in the formal channels, particularly entities established by governments, is the main reason for donors preferring informal channels. Kashif et al. (2018) have identified that, in the case of Pakistan, people in general do not trust their government to manage zakat. Bremer (2013) has also identified the reason donors prefer to pay zakat directly to the zakat beneficiaries is that they consider the government system to be unreliable. Nonetheless, several countries are providing tax incentives for donors who pay zakat to designated zakat bodies. These countries include, but are not limited to, Bangladesh, Indonesia, Malaysia and Sudan. In Saudi Arabia and Kuwait, zakat is fully integrated with income tax.

Different non-governmental zakat entities have been set up with their unique sets of value propositions. Their main objectives are to fully optimize zakat collection and distribute it to serve specific funding needs. These entities mainly operate online, allowing anyone to easily contribute zakat via an online transfer, using a debit card, PayPal account, and so on. They also generate reports to show the impact of their zakat activities. Examples of such initiatives include the UNHCR zakat fund and Global Sadaqah—an online platform based in Malaysia.

The UNHCR launched their zakat fund in September 2016 and officially unveiled their online zakat platform on 1 May 2018. Anyone can donate zakat using this online platform. The donor only needs to have a valid debit card, credit card or PayPal account. The donor can also use traditional bank transfers to donate their zakat. Even though UNHCR has received endorsements from five reputed Shariah authorities regarding their zakat fund, the accuracy of the zakat calculation remains the sole responsibility of the donor (UNHCR, n.d.).

Global Sadaqah is an online crowdfunding platform for zakat as well as sadaqah. It was launched in July 2018. The platform hosts different fund collection campaigns and invites the public to donate their charity in the form of zakat or sadaqah. The donors can choose any campaign according to their individual preferences. The contributions of many toward specifically targeted campaigns assure that the funding requirements will be met and that the campaigns will be a success. Vetting of each campaign prior to its being hosted on the platform, and disclosures made by the platform regarding funding status and other matters provide high assurance to the donors (Global Sadaqah, n.d.).

While the UNHCR and Global Sadaqah merely mobilize zakat from donor to receiver, the Center for Zakat Management (CZM) in Bangladesh does more than that. They utilize their zakat collection to undertake various programs. These include healthcare, livelihood development, scholarships, training, awareness building, emergency humanitarian assistance, microenterprise development, and so on (CZM, 2018). There are many other entities in different countries that undertake various initiatives to achieve socioeconomic impact through collection and distribution of zakat.

Payment of Zakat by Corporate Entities

Whether or not corporate entities should pay zakat, is debatable. There are some who argue that zakat is not payable by corporate entities while some argue the opposite (Hasan, 2008; Hasan, 2018). The chapter does not iterate the debate on zakat by corporate entities as the matter is well discussed in the literature. The chapter is developed based on the assumption that zakat is an obligation on Muslim shareholders. They are obligated to pay zakat if their respective corporate entities do not pay zakat on their behalf. Hence, there is a need for the shareholders to reliably calculate their zakat obligation if the zakat obligation is not calculated by their corporate entities.

In a few countries like Saudi Arabia, Pakistan and Sudan, zakat laws have explicitly covered the issue of business zakat. Recognizing the importance of zakat calculation by corporate entities, several international and national bodies have also issued standards on corporate zakat calculation. The notable ones include:

  • Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

  • Guidelines issued by Zakat House Kuwait

  • A technical release issued by the Malaysian Accounting Standards Board (MASB)

  • Guidelines issued by the Department of Waqf, Zakat and Hajj (JAWHAR) in Malaysia

One of AAOIFI’s early initiatives was to issue standards on zakat. Their first standard on zakat—Financial Accounting Standard (FAS) No. 9—was issued in 1995. They also issued Shariah Standard No. 35 on zakat in 2008. Even though these standards are primarily intended for IFIs (i.e., Islamic banks and takaful operators), they can be equally applied to other types of corporate entities.

AAOIFI in its Shariah Standard No. 35, Item 2/2/1 has identified the following circumstances in which a company is committed to pay zakat: (a) if local regulations require the company to pay zakat; (b) if the articles of association stipulate commitment of the company to pay zakat; or (c) if in a general assembly of the company, a resolution is passed for the company to pay zakat. If such a circumstance is absent in the case of a company, AAOIFI requires the company to at least disclose the amount of zakat payable per share (Shariah Standard No. 35, Item 2/2/5).

In Kuwait, since 10 December 2007, a zakat tax is enforced on all public and closed joint-stock companies (KPMG, n.d.). Many of the IFIs around the world also currently pay corporate zakat or zakat on behalf of their shareholders.

Nonetheless, in the context of Nigeria, Saad and Farouk (2019) argued that the absence of zakat law and zakat accounting standards are among the major barriers for a functional zakat management system. Meanwhile, Cokrohadisumarto, Zaenudin, Santoso and Sumiati (2019) argued that in Indonesia the absence of government regulations relating to zakat obligation necessitates enhanced disclosures on zakat collection.

However, the existence of zakat accounting standards has still not sufficed to gain the confidence of the community. Adnan and Abu Bakar (2009) argued that the existing standards and guidelines on zakat contain general misconceptions about zakat that result in inappropriate zakat accounting and reporting. Therefore, they argued that the current zakat calculation practices fail to capture the spirit of Shariah. Obaidullah (2016) cited Khan (2013), who commented that the existing zakat standards do not comprehensively cover business zakat.

Divergence in Zakat Calculation Practices

In Malaysia, the calculation of business or corporate zakat is subject to diverse calculation methods. Obaidullah (2016) cited Abdul Wahab (1995), who found that three different methods have been practiced by various states and institutions in Malaysia calculating zakat on business. These methods are: (1) current assets only; (2) current assets plus profits from investments; and (3) net working capital plus current profits. Nasir and Hassan (2005) found that zakat centers have recommended at least five methods for corporate zakat calculation. These are: (1) net assets (or working capital); (2) net equity (growth model); (3) net profit after tax; (4) combined methods; and (5) dividend methods.

Nonetheless, recent studies have found that IFIs are applying only three different methodologies for zakat calculation. These are: (1) net profit method; (2) working capital method; and (3) capital growth method. The latter two are argued to render the same amount of zakat obligation (AAOIFI, 2015; Lukman, Hussain, & Ahmed, 2018).

The competencies of the standard setters and zakat authorities play an important role in developing appropriate and applicable zakat standards. For example, Abdul Rahman and Awang (2003) have identified that improved competencies in Shariah and accounting on the part of the zakat administration staff at Pusat Zakat Selangor were a driving factor for it to move from a simple profit-based method of zakat calculation to more advanced working capital and capital growth methods.

The differences in the methodologies used are one matter, but the differences in details are a far wider issue. There are different opinions regarding zakat of different items. One classic example is zakat on debt; that is, who shall pay zakat on debt—the debtor or the creditor? What are the parameters for determining the ownership and control conditions of debts? Abdul Rahman and Awang (2003) and Obaidullah (2016) have identified issues pertaining to valuation of inventory; that is, whether it shall be valued at cost or current value. The classification of financial assets (e.g., financial assets at fair value through profit or loss, or at fair value through other comprehensive income and amortized cost) and their status as zakatable items are debatable among the Shariah fraternity.

Some have called for harmonization of zakat practices (Abu Bakar, 2007). However, this chapter recognizes the fact that the current industry practices are diverse. Therefore, any proposed solution needs to accommodate these diverse practices. The corporate entities need to be afforded the flexibility to adopt their own interpretation of Shariah and zakat rules. Hamat (2009) and Tajuddin (2017) found that different assessment methods for business zakat are necessary in order to fit with the particular characteristics of different businesses. Hence, this chapter argues that the corporate entities should be given enough flexibility to calculate their zakat obligations. The individual payers of zakat must also have the privilege of adopting their own preferences. There must be freedom of choice to adopt any opinion as long as it is supported by sound Shariah justification.

Zakat Deducted at Source (ZDS)

Traditionally, zakat has been contributed individually by Muslims based on their zakatableassets. The contribution could be amplified if corporate entities are also included as payers of zakat on behalf of their Muslim shareholders. In fact, many IFIs are currently paying zakat. Abbas, Sulaiman and Bakar (2018) have identified that 12 out of 16 Islamic banks in Malaysia pay zakat. The same could be replicated by other types of corporate entities. Similar to tax deducted at source (TDS)—which aims to maximize tax collection and minimize tax evasion, zakat deducted at source (ZDS) could be made compulsory by national authorities.

Kashif et al. (2018) have observed that the banks in Pakistan are required to deduct zakat at source. There the government nominates banks to collect zakat directly from the donor’s bank account(s) during the month of Ramadan. However, to evade this deduction at source, the bank account holders withdraw their money only to deposit it back once the zakat deduction deadline has passed. This creates a disturbance in banks’ operations.

Nonetheless, this scenario of Pakistan is unlikely to be replicated in the case of corporate entities. This is because investment in shares is not as liquid as bank deposits. Due to regular fluctuations in share price, exit and reentry might be costly for a shareholder. Regulatory restrictions could also be put in place to prevent actions that may disrupt the market. Hence, unlike a depositor in a bank, a shareholder is unlikely to liquidate his shareholding just to evade his zakat obligation. Furthermore, no research has found such zakat evasion behavior among the shareholders of zakat-paying entities, particularly zakat-paying IFIs.

Discussion

Even though companies are artificial persons, the ultimate obligation of zakat remains with the shareholders. Listing status is irrelevant to determine the zakat obligation of a company (Wahab, 2016). If a company pays business zakat, the shareholders do not have a further obligation to pay zakat on their shareholding. Hence, if a company pays zakat, it is very important to assure the shareholders that the zakat is paid in accordance with the Shariah.

However, there is no easy-to-adopt zakat calculation system that can be used by an entity that does not have the requisite Shariah and accounting expertise. Moreover, the system needs to provide transparency so that it can be subjected to public scrutiny, continuous monitoring and adaptation to the continuous changes in the financial reporting world. The system also needs to respect the different schools of Islamic jurisprudence so that it remains acceptable and relevant in the Muslim community at large.

There are several mobile applications and online platforms currently available on the market, but they allow only a basic zakat calculation option for individuals. They are in a very basic form that does not accommodate the unique financial reporting dimensions of different business types. They also do not allow for user choice between the different schools of Islamic jurisprudence. These limitations make them unsuitable for corporate entities in practice.

In overcoming these limitations, this chapter proposes a zakat calculation software that embodies more advanced and comprehensive features. The software would allow its users to calculate the zakat of different types of corporate entities and customize zakat calculation based on the user’s preference in Islamic jurisprudence.

The Proposed Zakat Calculation Software

Features of the Software

The proposed software could be used by any corporate entity to calculate zakat for their Muslim shareholders. The users of this software would not need to know the requirements of zakat calculation. They would only need to insert financial data in the required fields. The application would then automatically generate the zakat obligation amount.

The proposed software would provide a comprehensive range of features for calculation of the zakat of corporate entities. The software would be designed taking into account the needs of different business types; for example, financial institutions and manufacturing, trading, construction, property development, technology and service-providing entities. The layout of the installed software and financial reporting terms used will be business-type-specific. This will allow users to recognize the required fields easily. To avoid any omission or error, the software algorithm will automatically reconcile the inserted amounts.

Similar to the calculation of a company’s tax liability, financial statements will be used as the basis for calculation of zakat. The amounts reported in financial statements will be adjusted in deriving the zakat base of the company. The applicable zakat rate will be multiplied times the zakat base to determine the zakat liability.

The financial statement items will be identified based on the International Financial Reporting Standards (IFRS), which have been adopted in 144 jurisdictions as the basis for financial reporting (IFRS Foundation, 2018). The accountants of the corporate entities need not have knowledge about the different schools of Islamic jurisprudence for zakat calculation as the major opinions are already configured into the application. There will be a default setting based on the opinions of the majority of scholars, but there will also be customizable options.

The software will be configured with the requirements of different zakat accounting standards and schools of Islamic jurisprudence. The users will have the option to select their preferred standard and school in the calculation of zakat. The software can be installed with default settings or advanced settings.

The default settings will give results based on the majority or most acceptable opinion of the selected school. In the absence of such an opinion on a matter, the default settings will assume the requirement that provides the highest zakat obligation. This is to be on the safer side in terms of performing religious obligations. Each of the items will be linked to further description and Shariah basis for inclusion or exclusion in zakat calculation.

While the advanced settings (i.e., fully configured installation) will contain the same features as the default settings, it will also present different opinions on a single matter and allow the users to select any of the opinions presented. The opinions presented will be from within the same school as well as other schools. The users will immediately see the impact of their selection on the zakat obligation amount. Figure 18.1 shows the installation flow of the proposed zakat software.

Fig. 18.1
A flow diagram of installation in 8 types of industry, 5 prevailing zakat accounting standards, and 5 prevailing schools of Islamic jurisprudence and default and advanced settings.

Installation flow of zakat calculation software

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If the corporate entity is calculating zakat on behalf of its shareholders, then the opinion selected must be subjected to the approval of its board of directors and conform to any stipulation imposed by the state authorities. Whichever opinion the user selects, it must be applied consistently in the subsequent periods, unless a change of opinion increases the zakat obligation. Shifting between different opinions to reduce zakat obligation in the subsequent periods must not be allowed.

To ensure accountability and transparency, the corporate entities must make disclosures in their financial statements on the settings they have selected and the basis of their selection. They must also disclose the alternate zakat obligation amount in different settings, so that their Muslim shareholders can easily decide whether or not the zakat obligation has been duly discharged based on their individual preference.

Development Process

The zakat software will be developed in two stages. The first stage will involve the zakat calculation methodology, and the second stage will develop the software.

Stage 1: Development of a Zakat Calculation Methodology for Corporate Entities

An expert research team will be engaged at this stage to develop the zakat calculation methodology for the corporate entities. The team will comprise experts in financial reporting and Shariah. The work done by the team will be critically evaluated by a council of Shariah scholars.

The research team will examine the financial reporting standards and financial reporting practices of different types of corporate entities. The research team will further examine different schools of Islamic jurisprudence in establishing items that are: (1) subject to zakat obligation, (2) deductible in calculation of zakat obligation, and (3) excluded from zakat calculation.

The research team will gather sufficient evidence and arguments from different schools of Islamic jurisprudence in establishing the zakat status of individual financial statement items. The majority or most acceptable opinion will be identified while other opinions will also be noted.

The chapter does not propose unification of zakat practices as it is not easily achievable. It proposes to accommodate different interpretations of zakat rules as long as they are supported by strong Shariah justifications. Hence, the software is proposed with the belief that the users have freedom of preference for zakat rules as long as those have acceptable justifications and are supported by reputed scholars.

Stage 2: Development of the Zakat Calculation Software

The zakat calculation methodology developed by the research team will be used in developing the software. This will be done by a team of software developers. The research team will closely oversee the software development process. At the end of development, the software will go through several trial runs. The marketing of the software will commence only after receiving approval by the council of Shariah scholars. The zakat calculation software development process flow is illustrated in Fig. 18.2.

Fig. 18.2
A flow diagram has the identification of financial statement items, establishing shariah views, methodology for zakat calculation, development of software, and council of shariah scholars.

Zakat calculation software development process. (Source: Author’s own)

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Potential Usage

The ease of calculation will motivate the corporate entities to calculate zakat on behalf of their shareholders. The calculated zakat amount may eventually be paid by the entities or by the shareholders based on the disclosures made by the entities. The software will also enable the state authorities to impose and monitor zakat payments by the corporate entities under their jurisdiction. The software will overcome the possibility of miscalculation of the zakat obligation and bring transparency in the calculation method adopted, which is relevant to the IFIs as well. The derived zakat calculation methodology or software could also be integrated into zakat management platforms.

The software would have the potential to grow in the future. It could be further developed into an online zakat management platform that would facilitate transparent and efficient transnational flows of zakat funds. In disbursing the zakat funds, the recipients can be prioritized based on priorities of the time. The zakat recipients will also be categorized based on their sector and social impact. The developed methodology and software could be easily integrated with this platform.

The methodology and the software will be patented and protected under intellectual property rights. Any entity that wishes to use any of these would be subjected to royalty agreements and licensing. A software license fee could be imposed on its users or could be provided for free, depending on the financial needs of the developer. A differentiated fee structure can be adopted, with one fee for only the default setting and additional fees for the customizable options. The mobile application can also be developed, and its subscription can be subject to a fee payment.

Conclusion

Contribution of zakat by corporate entities will amplify global zakat collection. A well-developed software will make the zakat calculation easy and bring transparency. Reliable calculation of zakat will also make the concept of ZDS acceptable to the public. Another benefit of this might be a successful negotiation with the tax authorities in securing tax rebates for the amounts paid as zakat. With the continuous enhancement of the system, disclosures on zakat obligation by corporate entities can eventually be included as one of the criteria they would have to fulfill in order to be considered Shariah-compliant.