Former Deputy Auditor General of Pakistan Muhammad Akram Khan is one of the distinguished thinker and writer on the subject of Islamic economics. He had worked as Former Deputy Auditor General of Pakistan (until 2003) and as Chief Resident Auditor, UN Peacekeeping Missions (2003–2007). He is author of several valuable books and research papers in the field of Islamic economics. His famous book “What is Wrong with Islamic Economics” provided a critical and objective assessment of the field of Islamic economics and how it can overcome the challenges. He holds unique views in some matters based on arguments worth considering and debating. We got an opportunity to get his insights on contemporary application and institutionalization of Zakat and Ushr. We hope that his valuable insights will introduce new ways of thinking for young economists, social scientists and policymakers who share the goal of capitalizing on Islamic social finance for effective social protection.
Question: Respected Imam Abu Hanifa (R.A.) did not allow exemption in assessment of Ushr to be paid. Can this view be taken in modern times? If a person engages in production in such a way that each time, production is done inside the exemption limit of 5 Wasaq in a production cycle, then there will be no Ushr to be paid. By disallowing
exemption, it will also help in assessment and monitoring from the regulatory and governance perspective.
Muhammad Akram Khan: We need to understand the rationale for the exemption limit. In all systems of taxation, some exemption is given for personal maintenance and consumption of the income producer. If you disallow exemption on Ushr, it would be a case of hardship on the farmers.
For ensuring that the farmers come in the Ushr net, you will need to think of some other mechanism. Allah has sent down His Message not to collect taxes but for the guidance of mankind.
Question: A small retailer is supposed to pay Zakat on unsold inventory at yearend while factory owners having millions worth of productive machinery are asked to pay Zakat on few liquid assets subject to adjustment of debt. In modern banking system, larger industrialists are able to take on bigger loans from banks. They earn huge profits and reinvest them for buying more productive capital as means of production. So, should all the means of production be exempted from Zakat?
Muhammad Akram Khan: The idea that plant and machinery should be treated as tools of a workman is outdated and cannot make sense in the present-day of largescale industry. The simple method of taxing all businesses (big or small) is to take their final accounts as prepared according to the generally accepted principles of accounting and make some adjustments for liabilities and receivables to make them suitable for assessing the Zakat. I have demonstrated the method in my book, “What is Wrong with Islamic Economics”. Once you do that, the whole debate referred to in your question becomes unnecessary.
Question: Agricultural produce was a major source of earned income in olden times. Nowadays, there are other modes of earning income, such as rental income, capital gain on financial and real investments, consultancy income, services income, salaries etc. Allama Yousuf Qardawi in his book ‘Fiqh-uzZakat’ favours deduction at source of earned income as and when it is earned. Can this view be taken as it will be consistent with ‘Infaa Lil-Fuqura’?
Muhammad Akram Khan: Yes. It makes more sense. It is administratively convenient and more effective for collecting the tax. The whole world is following it. Why cannot we?
Question: Should earned income be treated under Ushr or Zakat? In contemporary view, rented buildings are only subject to Zakat on the rent value rather than entire value of investment by treating capital investment in real estate as means of earning income. In this case, if exemption is treated similarly as in Ushr, then can the rate of charge be Ushr as well given the fact that real estate investments and financial investments have intensive use of capital and not labour?
Muhammad Akram Khan: All income that a person gets by working (like, e.g., salaries) should be taxed at 5 percent (on the analogy of Nisf-Ushr) and all income that is earned without working (like, e.g., rents, and dividends on financial investments) should be taxed at 10 percent (on the analogy of Ushr).
Question: It is reported that during the rule of Umar Bin Abdul Aziz (R.A.), salaries were given after deduction of Zakat (Musannaf Ibn Abi Sahibah, Vol. 4, Pg. 42-44). In the case of levying Zakat on leftover savings from earned income at year-end, the potential Zakat payer has an opportunity to either spend the surplus wealth or convert it in assets not subject to Zakat just before the Zakat due date. If earned income is treated under Zakat, then is it possible to allow deduction at source as and when income is earned subject to adjustment at year-end?
Muhammad Akram Khan: The Zakat should be levied on (a) stock of wealth; as well as on (b) flow of wealth.
(a) For stock of wealth, like cash balances in the bank, it should be at 2.5 percent on the lower of the opening and closing balances as they are the balances on which a year has passed. Jewellery that women wear should be exempt like other personal assets. However, gold bought for purpose of storing wealth should be taxed at 2.5 percent of the market value of the gold at the year-end. If the stock of wealth is in the form of
properties or plots of land, any income will be taxed at 10 percent after deducting all direct expenses. But if the property does not produce any income (like a blank plot of land), then there will be no tax on it until it is sold, or a building is constructed on it. In case, it is sold, a tax of 10 percent will be levied on the net profit. In case a building is constructed, and the owner lives therein himself, there will be no tax. But if the building is rented out, then the tax will be 10 percent on net income (after deducting all expenses, maintenance charges, etc).
(b) On flow of wealth, like dividends, rents of buildings, pensions etc, Zakat should be charged on total receipts of the year at 10 percent on the analogy of Ushr. But on salaries, it should be at 5 percent on the total receipts of the year on the analogy of Nisf-Ushr. Wherever feasible, the Zakat should be deducted at source. It is an administrative matter and not governed by the Shari’ah law.
Question: Respected Imam Abu Hanifa (R.A.) opined that every produce from land is subject to Ushr while referring to a Hadith. Industrial production is also value added production on produce from land. Since land which does not produce is not subject to Ushr, the basis of Ushr seems to be production rather than land. In modern economy, agriculture sector contributes less than 20% to the production. Major production value comes from production in industrial sector and services sector. In light of these contemporary realities in economic organization and structure, should Ushr be extended to production and earned income from value creating activities in general?
Muhammad Akram Khan: Treat all industries and commercial enterprises as businesses and then calculate the net profit at the year-end by using generally accepted accounting principles. The balance sheet and income statement should be prepared afresh for Zakat purposes by adjusting for short-term liabilities and long-term receivables. In this manner, a new figure of net income will emerge. Zakat should be payable on the net income recalculated for Zakat purposes.
The part of the net income determined for the purpose of Zakat and distributed among the shareholders or partners would be liable for Zakat. All recipients of net income would pay Zakat on their global income including the income received from business. The rate of Zakat on the income from business would be 5 percent if the individual is working and not getting a salary. However, the rate of Zakat will be 10 percent if the profit is received without working. I have illustrated all this procedure in my book, “What is wrong with Islamic Economics”.
The Fiqhi principle of levying Zakat on inventory is a simplistic approach and was suitable when the business concerns were very small and most of the businesses were able to clear all or most of their stocks by the year-end. The nature of business has entirely changed. We must discard this old ruling and moving on to the modern methods of business and business accounting. Generally, all businesses should prepare their accounts on generally accepted accounting principles and determine their net income. In a second stage, this income should be adjusted for preparing an income statement and balance sheet for Zakat purposes.
Question: Can we introduce a collection mechanism on the pattern of general sales tax like levy at the rate of 5% (Nisf Ushr) on the premise that production is with intensive use of both labour and capital in industrial establishments? Such sales taxes are levied on production without regard for expenses as well. In Ushr as well, the cost of production is not deducted.
Muhammad Akram Khan: Whatever the nature of business: Industrial, agriculture or services, determine the net income by applying generally accepted principles of accounting, adjusting the net income for current liabilities and long-term receivables as discussed above) for arriving at an income on which Zakat will be payable by the recipients individually on their global income.
Question: Can earned income from financial investments where income is earned without providing labour effort be made subject to Ushr since only capital is employed to earn income? If yes, then deduction at source can enhance potential resource redistribution as well as ease the assessment and collection. Presently, government also relies heavily on deduction-at-source based withholding taxation for its ease of collection with minimal chances of evasion.
Muhammad Akram Khan: Income from financial investments should be taxed at 10 percent. It can be deducted at source and the person can be informed about that. He will then adjust that payment while preparing tax return on his global income.
Question: Council of Islamic Ideology has recommended in past to avoid double taxation. Should the corporation be regarded as separate juristic person? If yes, then is there a possibility of taxing corporations and shareholders separately?
Muhammad Akram Khan: Income from corporations can consist of two segments:
(a) dividends paid to partners or shareholders, and (b) income retained and transferred to funds and reserves.
Zakat on the dividends distributed should be at 10 percent to be paid by the individuals receiving the dividend unless a shareholder is actively working. In that case, the profit will be charged at 5 percent. Alternatively, if he gets a salary and is also entitled to a share in profit from the business operations, his salary shall be taxed at 5 percent and the share of profit from business operations at 10 percent. For all other shareholders, the Zakat should be assessed at 10 percent of the dividend.
In case of reserves and funds, Zakat should be charged at 10 percent from the corporation.
In all cases, wherever it is possible to deduct the Zakat at source, it should be done, and the person informed, who should be able to adjust it while filing return on his global income.
In case a person buys and sells shares on the stock exchange and does not hold them for a period till the final accounts are prepared and the dividend or loss is determined, the person will pay Zakat on the gain or loss on each deal by subtracting the purchase price from the sale price. In case of gain, the capital gain will be taxed at 10 percent.
The shareholders on the date of balance sheet will pay Zakat on the net profit of the
corporation on the basis of revised accounts for the Zakat purposes. The corporation would inform these holders of the shares about their Zakat liability.
They will be able to adjust this amount while filing their Zakat return on global income.
The question would arise: what if a person invests in shares for a short while and keeps on rotating his capital in buying and selling of shares and he never earns any dividend?
The answer is: In that case, each time he buys or sells shares, he would be making some financial gain or loss. At the year-end, all these gains and losses would be netted and if there is a net gain, he shall pay Zakat at 10% on the net gain. The capital would remain exempt until it is included in the idle cash and remains sitting there for a year.
Question: Is it possible to introduce Ushr on capital gain (earned income) on the premise that only capital is employed to earn capital gain?
Muhammad Akram Khan: All capital gains on sale of shares or of other assets (such as buildings, machinery, etc.) should be charged at 10 percent on the net amount received by the recipient.
Question: Allama Yousuf Qardawi contends that nowadays, wealth is stored in many forms. He favours determining an average standard of living and then subjecting asset and wealth beyond needs under Zakat. For instance, if a person owns multiple houses and multiple modes of transport, then, beyond his needs, the extra wealth stored in real estate and means of transport shall be subject to Zakat. Can this view be taken keeping in view promotion of ‘Infaa Lil-Fuqura’, discouragement of ‘Israf’, ensuring distributive justice and avoiding concentration of wealth within the rich (Al-Hashr, verse 7)?
Muhammad Akram Khan: Except for a house in which a person lives and a car which is needed for personal use, all other assets should be evaluated at the year end and taxed at 2.5 percent of the value. However, if a house or a car is earning income, then the asset value will not be taxed. Instead, net income from that asset will be taxed at 10 percent. Just exempt the assets that a person uses and tax everything else.
Question: Several Ahadith refer to surplus livestock and ornaments cursing and punishing the holder on Judgement day (Sahih Muslim, Book of Zakat, Hadith No. 2166). One Hadith says that a woman who had bangles was warned to give Zakat on them, else, in punishment, one may be given bangles of fire to wear on judgement day (Sunan-Nisai, Book of Zakah, Hadith No. 2479). Is it a considerable view that those Ahadith were discouraging hoarding of wealth and not paying Zakat on them by referring to the common forms of wealth prevalent during the time of Prophet Muhammad (PBUH)?
Does the concept of ‘Adl’ demand that hoarding wealth in the form of luxurious cars and spacious homes beyond needs shall be subject to similar attitude and tendency that is discouraged and condemned in Ahadith?
Muhammad Akram Khan: I am not an expert on hadith. However, common sense says that all things of personal use like dresses and ornaments should be exempt. Otherwise, we should explain why a person living in a house of, for example, one acre and having several cars with a number of personal servants is exempt from Zakat on his cars, houses and services received from servants but a small government servant whose wife is having only 85 grams of gold should be paying Zakah on that gold. Such questions will continue chasing us.
Question: In the light of improvement in monitoring technology, record keeping and documentation, is it necessary to keep the distinction of Amwal-e-Zahira and Amwal-e-Batina when many wealth forms are declared in wealth statement as a requirement and property rights are safeguarded only if ownership is registered with relevant government departments.
Muhammad Akram Khan: All administrative matters should be decided considering ground conditions with the intention of following the spirit of the law.
Question: In the case of Ushr, can average productivity i.e. yield in an area be used to assess Ushr as it can help in assessment by applying the average yield to a particular cropping area whose size is easily measurable, but its yield is not measurable at the time of harvest or afterwards. Sometimes, even the owner is not confirmed about actual productivity and may keep no documentation.
Muhammad Akram Khan: It is quite reasonable to adopt average productivity as a rule of thumb until evidence to the contrary is available.
Question: Is it possible to use Wakalah bil-Qabz in collecting and Wakalah-bil-Sarf in allocation of Zakat where the institution providing welfare services to the poor is made Wakeel to receive and allocate Zakat on behalf of Mustaheqeen on their welfare with approval? Is it allowed also in cases where ownership is not confined privately, but services are provided to the Mustaheqeen from the assets which are funded from the Zakat funds?
Muhammad Akram Khan: This is an administrative matter and should be decided as is more convenient, least costly, and most effective. If we keep the objectives of Zakat in view and the betterment of the poor before us, all administrative matters can be decided appropriately. No need to indulge in Fiqhi rulings which were given centuries ago.