Accounting Principles and Concepts

An Overview of Zakat and Zakat Declaration

Zakat Declaration

An Overview of Zakat and Zakat Declaration

In the Islamic faith, Zakat, one of the Five Pillars, is a compulsory act of charity. It is an annual payment calculated based on the value of specific types of wealth owned by a Muslim who meets certain conditions. This wealth is then distributed among designated categories of recipients. This obligatory act of giving symbolizes the purification of the giver's wealth and is considered a crucial part of the Islamic social welfare system.

The Zakat Declaration, on the other hand, is a formal statement made by individuals or businesses about their Zakat payment. This formal acknowledgment ensures transparency and accountability in the process, ensuring that the wealth is appropriately distributed among those entitled to receive it.

In this article, we'll discuss the importance of Zakat, go deeper into the concept of a Zakat Declaration, and explore how you can prepare your own declaration.

Learn more about Zakat and other essential topics for businesses in KSA with Wafeq's blog.

The Principles of Zakat

This section will go through the basics of Zakat, explaining who is obligated to pay it, the concept of nisab or the minimum amount of wealth on which Zakat is due, and the different types of wealth that are eligible for Zakat.

Understanding the principles of Zakat is key to ensure it's correctly calculated and paid.

Who Should Pay Zakat: Zakat is mandatory for every Muslim who possesses the requisite minimum amount of wealth (nisab) for a whole lunar year. This includes individuals, businesses, and organizations.

The Nisab: Nisab refers to the minimum threshold of wealth that makes a person liable to pay Zakat. This amount is equivalent to the value of 85 grams of gold or 595 grams of silver. For businesses, nisab is determined by the value of the goods in commerce.

Zakat-Eligible Wealth: Wealth that is Zakat-eligible includes cash (both in hand and in banks), shares, pensions, money owed to you, agricultural produce, livestock, and other assets. Note that personal items such as home, furniture, cars, food, and clothes are not Zakat-eligible.

Read more: Tax In KSA: Income Tax, Zakat, And Other Taxes Simply Explained.

Zakat Declaration: Its Importance and How to Prepare it

A Zakat Declaration is a formal statement that discloses the amount of wealth that a Muslim individual, business, or organization possesses and is, therefore, subject to Zakat. It is a way to demonstrate transparency and compliance with Islamic principles.

Who Should Submit a Zakat Declaration: As with the payment of Zakat, the Zakat Declaration should be submitted by every Muslim who possesses the requisite minimum amount of wealth (nisab) for a whole lunar year. Businesses and organizations, as well as individuals, should present a Zakat Declaration.

Significance of a Zakat Declaration: The Zakat Declaration is significant for several reasons. First, it provides transparency about a person's, business's, or organization's wealth and the Zakat owed. Second, it can help to prevent any disputes or disagreements about the amount of Zakat to be paid. Finally, it demonstrates a commitment to the Islamic principle of Zakat and serves as a form of religious and moral accountability.

How to Calculate Zakat

To accurately fulfill the obligation of Zakat, it is essential to understand how it is calculated. The calculation process comprises various elements, depending on the type of wealth one possesses. However, the primary principle remains that Zakat is owed at a rate of 2.5% on wealth or assets that have been in one's possession for a full lunar year, assuming they meet or exceed the nisab (minimum threshold)

In the context of a business, the Zakat is calculated based on the net assets of the company. This includes all the financial resources available to the company, such as ownership rights, retained earnings, and various types of debt. This total is used to determine the Zakat base by subtracting fixed assets and similar elements.

The calculation of Zakat can be summarized in the following equation:

Zakat Base = Total financial resources – Fixed assets and equivalent items.

Zakat Owed = 2.5% of Zakat Base

It is critical to keep meticulous records of your finances for an accurate calculation of Zakat. Ensure to include all zakatable assets in your calculations and consider any debts you may have, as these can reduce the amount of Zakat you owe.

Please note that the calculation of Zakat can be complex depending on your financial situation. It is always recommended to seek advice from a knowledgeable scholar or a professional advisor who is familiar with Islamic finance to ensure the accuracy of your calculation.

By understanding how to calculate Zakat, you not only ensure compliance with your religious obligation but also contribute to the fair distribution of wealth in society, one of the key objectives of Zakat.

Preparing and Submitting Your Zakat Declaration

To fulfill your obligation of Zakat properly, it's essential to know how to prepare a Zakat Declaration correctly. This process, while it may appear daunting, can be broken down into manageable steps. These steps are generally as follows:

  • Access the 'Electronic Services' on the main menu of the Zakat, Tax, and Customs Authority's website.
  • Click on 'Declarations' followed by 'Zakat Services'.
  • Choose 'Submit Zakat Declaration'.
  • Select the type of declaration you need to submit.
  • Fill in all your financial information accurately.

After submitting the declaration, a message will be sent to your mobile phone containing the invoice number. Once you have paid the amount due, a certificate will be issued.

It is important to note that, to access this service and submit a Zakat Declaration, you must initially register in the 'Zakat Registration' section. Compliance with the prescribed deadlines for submission of your Zakat Declaration is critical to avoid penalties, which can range from a 5% to a 25% fine of the value of the tax that should have been declared.

Legal Obligations and onsequences of Zakat Non-Payment

This section will focus on the penalties stipulated by the regulations for not fulfilling Zakat duties, discussing the importance of paying Zakat on time to avoid potential fines. It will also detail the scenarios where fines are levied due to delays in Zakat payment and other violations related to tax evasion and non-compliance with tax regulations. The specific conditions and types of violations that could result in fines will be discussed for clarity.

Related articles: What is zakat for businesses KSA and how is it calculated?

The Role of Zakat and Zakat Declaration in Fair Wealth Distribution

Zakat, as one of the Five Pillars of Islam, plays a significant role in promoting social justice and economic stability. By ensuring that a portion of wealth is redistributed to those in need, Zakat effectively reduces wealth disparities and fosters a sense of brotherhood and solidarity within the community.

Similarly, the Zakat Declaration is equally significant, serving as a transparent tool that ensures individuals fulfill their Zakat obligations accurately. It's an accountability measure that strengthens the integrity of the Zakat system and contributes to the overall economic and social well-being of Islamic society.

In conclusion, understanding the principles of Zakat, how to calculate it, and the process of preparing a Zakat Declaration are critical for Muslims. Not only does this practice reflect the core Islamic value of charity, but it also drives social equity by promoting the fair distribution of wealth.

Streamline your business's Zakat compliance with Wafeq, an accounting software designed for SMEs in KSA.

For accurate Zakat calculations, businesses should consult a professional or refer to the ZATCA guidelines.