Individual Debts Owed to the Government: Are They Subject to Zakah?
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Praise be to Allah alone, and peace and blessings be upon the one after whom there is no prophet. The Permanent Committee for Scholarly Research and Ifta has reviewed what was sent to His Eminence the Grand Mufti from His Excellency the Minister of Finance, reference number (185/14711), dated 3/12/1424 AH, and referred to the Committee by the General Secretariat of the Council of Senior Scholars, reference number (11125), dated 5/12/1424 AH. His Excellency asked questions to which the Committee responded as follows: Q1: A fatwa, number (20452), dated 7/9/1415 AH, was previously issued regarding debts owed to a person liable for zakah by others, stating: “If their rights are delayed without their choice, no zakah is due on them until they receive their rights and a new lunar year passes over them; because
Allah, Glorified and Exalted, says:[At-Taghabun 64:16], and zakah is a means of support from the rich to the poor, and it is not obligatory for them to support with something that is not within their control. This applies to all debts owed by those who are unable to pay or who delay payment; their zakah is due only when they receive the debt and a lunar year passes over it after receipt.” Some specialists hold that this fatwa does not apply to debts owed to a person liable for zakah by government entities, based on the fact that these debts are due from a government entity that is wealthy and capable of paying, and that the delay in collection is expected by the creditor and may be accepted by him, because he knows when dealing with a government entity that what is due to him may be delayed in disbursement due to the circumstances of the state’s general budget; but in the end, the debt is owed by an entity that acknowledges it, does not delay in paying it, and is capable of paying it, even if payment is delayed somewhat. We hope for clarification of the legal opinion regarding this matter?
A1: Amounts due to a person from any government entity, if their payment is delayed for any reason by that entity, even if the owner of the right is aware of it, no zakah is due on them until he receives them and a lunar year passes over them after receipt, based on the saying of Allah the Exalted:[At-Taghabun 64:16], and because zakah is a means of support, it is not due
on a person who cannot receive it and has nothing of it in his possession.
Q3: A fatwa, number (1570/2), dated 1/8/1405 AH, was previously issued, stating: “Advance revenues received by a person liable for zakah, such as advance rent received in exchange for leasing properties, lands, or other assets for several years, must be added to the zakah base if it reaches the nisab and a lunar year passes over it from the date of the completion of the contract.” In order to place the fatwa in its correct executive framework and to prevent any potential disagreement, it is necessary to clarify the meaning of the phrase “from the date of the completion of the contract” used in the fatwa, as well as the extent to which the fatwa applies to other advance revenues other than advance rent. The Zakat and Income Department holds that other advance revenues, such as advance payments to contractors under a construction contract, advance payments for the manufacture of equipment and goods or a specific product in industrial facilities, and advance payments for the supply of materials in supply contracts and similar matters, do not have the nature of advance rent, because one of the conditions for zakah liability is absent, namely the condition of complete ownership; however, they are subject to zakah when received and a lunar year passes over them, considered as a loan (advance payment) deducted from the contractor’s dues after delivery or execution.
It is worth noting that advance revenues appear as a result of the taxpayer following the accrual basis in preparing his accounts for recording his revenues and expenses. This basis requires that only the revenues and expenses belonging to the current year be included in the accounts for that year, and any revenue received by the taxpayer in excess of what belongs to the current year is considered an advance revenue. It is not necessary for the advance revenue to remain in cash form at the end of the lunar year; rather, it may be absorbed into various assets owned by the taxpayer. We hope for clarification of the following: 1- The meaning of the phrase: “from the date of the completion of the contract” used in the aforementioned fatwa. 2- The legal ruling and the obligation of zakah on advance revenues .
A3: The meaning of the phrase “from the date of the completion of the contract” in the aforementioned fatwa is: from the date of the contract. As for advance revenues received by a person liable for zakah, such as advance payments to contractors and advance payments for materials in supply contracts, zakah is due on them when a lunar year passes over them from the time of their receipt and they reach the nisab either by themselves or by being added to the rest of his wealth, because they enter into his ownership and he is permitted to dispose of them.
Q4: In some cases, the taxpayer realizes a net profit resulting from
engaging in commercial activity in a given year. When calculating the zakah, it becomes clear from the actual accounts submitted by the taxpayer that the net value of fixed assets (means of production) exceeds the total equity represented by the taxpayer’s capital and what is treated as such, in addition to the profit (net profit) for that year. The Department operates according to the procedure applied and established for many years, which is to deduct fixed assets within the limits of equity (capital and what is treated as such, such as reserves, etc.), and the zakah base is represented by the net profit for the year, meaning that the taxpayer’s zakah base in such a case does not fall below the net profit for the year under calculation. Some taxpayers object to the Department’s procedure by saying: The net profit (earnings) realized has been used to purchase fixed assets, and therefore there is no zakah on it, because it has been converted into what is considered a non-trade asset on which zakah is not due. Some specialists in the Zakat and Income Department support the view that there is no zakah on any wealth that has been invested in purchasing fixed assets before the lunar year passes over it, even if its source is the profits of the year (the lunar year of the profit is the lunar year of its source). On the other hand, other specialists hold that the Department’s procedure is correct, based on the fact that the net profit for the year under calculation is not determined
until the accounts are closed at the end of the financial year, and it is not possible to say that the purchase of fixed assets during the year was made from net profits that had not yet been realized and are only actually determined at the end of the year. We hope for your Eminence to clarify the legal opinion regarding the validity of the current procedure of the Zakat and Income Department, which consists of deducting the net value of fixed assets appearing in the taxpayer’s accounts within the limits of equity, such that the taxpayer’s zakah base does not fall below the net profit for the year.
A4: What is taken from the factory’s revenues – on which zakah is due – to purchase assets, or what its owner spends on other than trade goods before the completion of the lunar year, has no zakah on it, because it was spent on other than trade before the completion of the lunar year over it.
Q5: Zakah is a religious obligation, and every Muslim must fulfill it. It becomes due when a lunar year passes, as it is the third pillar of Islam. We have notably observed that some taxpayers delay registering with the Zakat and Income Department as required by the systems and directives approved by the ruler. Also, some do not delay in submitting their zakah declarations to the Zakat and Income Department and paying the zakah due on them, despite engaging in their commercial activity and continuing in it for several years, with their ability to fulfill what is due on them without delay. One of the reasons for this may be the lack
Given the existence of a deterrent penal measure currently applied to those who are late in this regard, if a person submits his zakah declaration every year and pays it on that basis, just as one who fails to submit his declaration for several years (currently up to ten years, and possibly more), is it permissible to impose a discretionary financial penalty on one who does not comply with submitting his zakah declaration after the end of his financial year and the expiration of a specific deadline for doing so, and on one who does not register with the authority, such as an annual fine, either a fixed amount or a specific percentage of the amount whose payment is delayed? And what are the limits of the financial penalty that the Shari'ah permits to be applied? It is known that applying such a measure would contribute significantly to the compliance of those obligated to register with the authority and pay the zakah due to the public treasury, and thereby its distribution in its lawful channels, which is the primary objective of this, not the financial penalty in itself.
Q5: It is not permissible to impose a financial penalty for the delay of the owner of wealth in paying the obligatory zakah due on him.
Allah, Glorified and Exalted, says:
So fear Allah as much as you are able
فَاتَّقُوا اللَّهَ مَا اسْتَطَعْتُمْA1: Amounts due to a person from any government entity, if their payment is delayed for any reason by that entity, even if the owner of the right is aware of it, no zakah is due on them until he receives them and a lunar year passes over them after receipt, based on the saying of Allah the Exalted:
So fear Allah as much as you are able
فَاتَّقُوا اللَّهَ مَا اسْتَطَعْتُمْon a person who cannot receive it and has nothing of it in his possession.
Q3: A fatwa, number (1570/2), dated 1/8/1405 AH, was previously issued, stating: “Advance revenues received by a person liable for zakah, such as advance rent received in exchange for leasing properties, lands, or other assets for several years, must be added to the zakah base if it reaches the nisab and a lunar year passes over it from the date of the completion of the contract.” In order to place the fatwa in its correct executive framework and to prevent any potential disagreement, it is necessary to clarify the meaning of the phrase “from the date of the completion of the contract” used in the fatwa, as well as the extent to which the fatwa applies to other advance revenues other than advance rent. The Zakat and Income Department holds that other advance revenues, such as advance payments to contractors under a construction contract, advance payments for the manufacture of equipment and goods or a specific product in industrial facilities, and advance payments for the supply of materials in supply contracts and similar matters, do not have the nature of advance rent, because one of the conditions for zakah liability is absent, namely the condition of complete ownership; however, they are subject to zakah when received and a lunar year passes over them, considered as a loan (advance payment) deducted from the contractor’s dues after delivery or execution.
It is worth noting that advance revenues appear as a result of the taxpayer following the accrual basis in preparing his accounts for recording his revenues and expenses. This basis requires that only the revenues and expenses belonging to the current year be included in the accounts for that year, and any revenue received by the taxpayer in excess of what belongs to the current year is considered an advance revenue. It is not necessary for the advance revenue to remain in cash form at the end of the lunar year; rather, it may be absorbed into various assets owned by the taxpayer. We hope for clarification of the following: 1- The meaning of the phrase: “from the date of the completion of the contract” used in the aforementioned fatwa. 2- The legal ruling and the obligation of zakah on advance revenues .
A3: The meaning of the phrase “from the date of the completion of the contract” in the aforementioned fatwa is: from the date of the contract. As for advance revenues received by a person liable for zakah, such as advance payments to contractors and advance payments for materials in supply contracts, zakah is due on them when a lunar year passes over them from the time of their receipt and they reach the nisab either by themselves or by being added to the rest of his wealth, because they enter into his ownership and he is permitted to dispose of them.
Q4: In some cases, the taxpayer realizes a net profit resulting from
engaging in commercial activity in a given year. When calculating the zakah, it becomes clear from the actual accounts submitted by the taxpayer that the net value of fixed assets (means of production) exceeds the total equity represented by the taxpayer’s capital and what is treated as such, in addition to the profit (net profit) for that year. The Department operates according to the procedure applied and established for many years, which is to deduct fixed assets within the limits of equity (capital and what is treated as such, such as reserves, etc.), and the zakah base is represented by the net profit for the year, meaning that the taxpayer’s zakah base in such a case does not fall below the net profit for the year under calculation. Some taxpayers object to the Department’s procedure by saying: The net profit (earnings) realized has been used to purchase fixed assets, and therefore there is no zakah on it, because it has been converted into what is considered a non-trade asset on which zakah is not due. Some specialists in the Zakat and Income Department support the view that there is no zakah on any wealth that has been invested in purchasing fixed assets before the lunar year passes over it, even if its source is the profits of the year (the lunar year of the profit is the lunar year of its source). On the other hand, other specialists hold that the Department’s procedure is correct, based on the fact that the net profit for the year under calculation is not determined
until the accounts are closed at the end of the financial year, and it is not possible to say that the purchase of fixed assets during the year was made from net profits that had not yet been realized and are only actually determined at the end of the year. We hope for your Eminence to clarify the legal opinion regarding the validity of the current procedure of the Zakat and Income Department, which consists of deducting the net value of fixed assets appearing in the taxpayer’s accounts within the limits of equity, such that the taxpayer’s zakah base does not fall below the net profit for the year.
A4: What is taken from the factory’s revenues – on which zakah is due – to purchase assets, or what its owner spends on other than trade goods before the completion of the lunar year, has no zakah on it, because it was spent on other than trade before the completion of the lunar year over it.
Q5: Zakah is a religious obligation, and every Muslim must fulfill it. It becomes due when a lunar year passes, as it is the third pillar of Islam. We have notably observed that some taxpayers delay registering with the Zakat and Income Department as required by the systems and directives approved by the ruler. Also, some do not delay in submitting their zakah declarations to the Zakat and Income Department and paying the zakah due on them, despite engaging in their commercial activity and continuing in it for several years, with their ability to fulfill what is due on them without delay. One of the reasons for this may be the lack
Given the existence of a deterrent penal measure currently applied to those who are late in this regard, if a person submits his zakah declaration every year and pays it on that basis, just as one who fails to submit his declaration for several years (currently up to ten years, and possibly more), is it permissible to impose a discretionary financial penalty on one who does not comply with submitting his zakah declaration after the end of his financial year and the expiration of a specific deadline for doing so, and on one who does not register with the authority, such as an annual fine, either a fixed amount or a specific percentage of the amount whose payment is delayed? And what are the limits of the financial penalty that the Shari'ah permits to be applied? It is known that applying such a measure would contribute significantly to the compliance of those obligated to register with the authority and pay the zakah due to the public treasury, and thereby its distribution in its lawful channels, which is the primary objective of this, not the financial penalty in itself.
Q5: It is not permissible to impose a financial penalty for the delay of the owner of wealth in paying the obligatory zakah due on him.
Source
www.alifta.gov.sa
The Arabic text is copied verbatim from the original source, without any edits.