By: Mr. N M M Mifly
Retired Deputy Commissioner General
Inland Revenue Department
mifly@mifatax.lk
Zakath becomes a focal point of discussion among Muslims worldwide during the month of Ramadan, the ninth month of the Islamic lunar calendar, which comprises 354 days. Although Islamic law does not designate month of Ramadan as the statutory deadline for the payment of Zakath, many Muslims choose to discharge this religious and social obligation during this blessed month, seeking its heightened spiritual rewards.
The objective of this article is to briefly explain the concept of Zakath and the mode of its computation using accounting and other modern terminology. It does not seek to draw a comparison between Zakath and modern income tax, as a comparative analysis titled “Zakath and Tax: A Comparative View” has already been published in the Daily FT. (https://www.ft.lk/opinion/Zakath-and-tax-A-comparative-view/14-760266)
The Foundation of Zakath
The enduring strength and universal applicability of Islamic law lie in its flexibility and adaptability in application and implementation, without compromising its essential and fundamental principles. Accordingly, employing modern technologies and contemporary terminology to understand and articulate religious concepts is entirely consistent with the spirit and framework of Islamic law.
It is a matter of regret that some conservative scholars confine themselves to the literal interpretation of a few Islamic texts, rather than considering their broader context and underlying objectives when understanding and explaining the concept of Zakath.
The obligation of Zakath is firmly rooted in the primary sources of Islam:
- “Establish prayer and pay Zakath, and whatever good you put forward for yourselves—you will find it with Allah.” (Quran 2: 110),
- “Take from their wealth a charity by which you purify them and cause them increase, and pray for them…” (Quran 9: 103)
- “They ask you what they should spend. Say: what is beyond your needs.” (Qur’an 2:219)
- “Indeed, Allah is Pure and He accepts only that which is pure.” (Hadith)
These foundational evidences demonstrate that Zakath is not merely a ritual act of worship. It is a divinely instituted socio-economic mechanism designed to purify wealth from greed and selfishness while promoting social justice, poverty alleviation, and reduction of income disparities.
What is Zakath?
Zakath is a mandatory financial obligation imposed upon every Muslim whose annual net wealth exceeds a prescribed threshold known as Nisab. It applies irrespective of gender or place of residence.
Importantly, Zakath is not voluntary charity. It is a structured and regulated system embedded within Islamic law. It operates on a self-assessment basis: each eligible Muslim independently determines his or her net wealth and discharges 2.5% annually.
As an act of worship, Zakath is fulfilled out of religious conviction and accountability to the Almighty. The Zakath-payer bears moral and spiritual responsibility before God, placing sincerity and integrity at the heart of its observance. Consequently, room for the evasion or avoidance is inherently minimal when faith and conscience remain intact.
Amidst existence of several similarities between Zakath and modern tax systems, its fundamental characteristic lies in its basis of assessment: Zakath is levied on accumulated net wealth rather than on income earned as in the case of income tax.
Preconditions for Zakath Liability
Five essential conditions must be satisfied before Zakath becomes payable:
- Full and Legitimate Ownership of Wealth: The wealth must be lawfully and ethically acquired. Assets obtained through theft, fraud, bribery, or interest (non-Halal means) do not constitute legitimate ownership. Such wealth is neither Zakathable nor capable of laundering through Zakath.
- Attainment of the minimum value (threshold) of the wealth: The minimum threshold is generally equivalent to 84 grams of pure gold. Based on current market values, this approximates LKR 4 million (subject to fluctuation in gold prices). Once the threshold is reached, he is liable to pay Zakath on the entire value of the wealth, including the threshold.
- Growth Potential. The wealth must be inherently capable of generating income—either actually or potentially. Cash savings, trading inventory, and investment assets qualify because they possess growth potential.
Assets acquired primarily for business or investment purposes—even if temporarily used for personal purposes—remain Zakathable.
However, purely personal assets such as a primary residence, personal-use jewellery, and fixed assets used for production (e.g., land, buildings, plant and machinery, and long-term dividend investments) are excluded.
- Surplus over Essential Needs and Debts: Zakath is payable only on wealth remaining after meeting essential personal and family needs—food, shelter, education, healthcare, and necessary transport—and after deducting short-term liabilities. Hence, the wealth in excess after deduction of the expenditures- including short term liabilities- incurred in acquisition of such basic needs, is liable to pay Zakath on it.
- The wealth should be in his possession for not less than one year. Liability to pay Zakath commences after the completion of one lunar year from the day the value of the wealth reaches its threshold (Nisab).
Accordingly, any Muslim who possesses wealth and has fulfilled the said five (05) preconditions is required to pay Zakath each year on a self-assessment basis, at a rate of 2.5%.
Zakath Is Computed on Wealth Retention, Not on Wealth Generation.
The core principle of Zakath is that it is levied on accumulated net wealth, not on income at the moment it is earned. Income becomes relevant only when it is converted into savings or assets and remains in one’s possession over time.
Under modern income tax systems, taxation arises when income is earned—regardless of whether it is saved or spent. In contrast, under Zakath:
- If income is entirely spent on legitimate personal and family needs, no Zakath is payable.
- Zakath becomes due only when wealth accumulates, exceeds the prescribed minimum threshold, and remains in possession for one full lunar year.
A person is therefore regarded as liable for Zakath not merely because of the volume of income earned, but because of the possession of surplus assets after meeting his own and his dependents’ essential and lawful needs. This fundamental characteristic clearly demonstrates that Zakath is directed at wealth retention, not wealth generation.
In accounting terms: Zakath is computed primarily on balance sheet items (net current assets), whereas income tax is computed on profit and loss account results.
Types of Wealth Liable to Zakath
Zakathable wealth refers to the total value, as at a given date, of all current assets that are fully and legitimately owned, under one’s effective control, and capable of growth—whether actual or potential. The concept of “growth” in this context includes not only physical increase, but also assets that generate income or are held for commercial gain.
Due to space limitations, this article focuses primarily on business ventures—namely trading, industry, services, and related activities—which are estimated to account for more than 80% of total Zakath contributions.
Accordingly, the following categories of wealth fall within the scope of Zakath:
- Cash and Cash Equivalents: This includes cash in hand, bank balances, foreign currencies, gold and silver, and jewelry that is not intended for personal or household use.
- Business Assets and Merchandise: All goods held for resale—whether movable or immovable—are Zakathable. This includes trading stock, raw materials, work-in-progress, and finished goods. Income receivable from services rendered, whether through employment or self-employment, is also included when it becomes due and collectible.
- Short-Term Receivables: Amounts receivable from credit sales, loans advanced, and recoverable advances or deposits are included, provided there is a reasonable expectation of recovery.
- Short-Term Investment Assets: Shares and securities acquired for trading purposes.
- Long–term Liabilities: These assets financed by such long term liabilities should not be excluded from the computation of Zakath merely because the payer is not their legal owner. In substance, he enjoys beneficial ownership, as he continues to utilize the funds or assets of others—whether obtained from a lender or creditor—for a longer period. Accordingly, such amounts fall within the scope of wealth effectively under his control and should be considered in the Zakath calculation.
In essence, Zakath applies primarily to accumulated, productive, and trade-oriented wealth rather than to assets held strictly for personal use or to fixed assets used for generating income. It is a levy on net current assets that reflect economic capacity and growth potential.
What are the assets excluded from the scope of Zakath.
- Domestic and Fixed Assets.
As explained above, Zakath is charged on the net wealth that consists of the net current assets. Accordingly fixed assets which are long term assets used for production of income, such as land & buildings, plants and machineries and the domestic assets that are used for personal purposes such as jewelry, motor cars, and living houses are falling out of the scope of Zakath.
- Short term & Long term Liabilities.
In ancient times, there was no distinction between short-term and long-term assets and liabilities, as such terminologies emerged only after the Industrial Revolution. Almost all liabilities were short-term, and similarly, debts were also of short duration. As a result, all debts were considered current assets.
Accordingly, early Islamic scholars, based on the principle of “Full Ownership of Wealth,” asserted that net wealth should be calculated by deducting liabilities and adding debts. Thus, a few contemporary Islamic scholars also held the view that all liabilities should be deducted and all debts added back—without distinction—when calculating net wealth.
However, some more contemporary scholars correctly argue that only liabilities and debts due within one year should be deducted or added back –as the case may be- when calculating net wealth, while long-term liabilities and debts—those payable after one year—should not be deducted. Instead, the person responsible for a long-term liability (the creditor) must pay Zakath on it, and the person obligated to repay a long-term debt (the debtor) must also account for Zakath accordingly.
Accordingly, in computing net wealth for Zakath purposes, the following adjustments relating to debtors and creditors should be made:
- Short-term receivables (due within one year) are added.
- Long-term receivables (due after one year) are deducted.
- Short-term payables and loans are deducted.
- Long-term payables and loans are not deducted.
This distinction reflects modern financial structuring, which did not exist in early commercial societies. Contemporary scholarly interpretation therefore adapts foundational principles to modern accounting realities.
- Illegally and unethically acquired assets.
One of the crucial prerequisites for the liability to pay Zakath is the complete legitimate ownership of the wealth. It means that the Zakath payer should have acquired the ownership of the wealth legally and ethically. If the wealth was obtained through unlawful (non-Halal) means—such as from theft, fraud, bribery, or interest—it does not constitute rightful ownership. Consequently, such wealth is not subject to Zakath, nor can one purify or launder it by paying Zakath.
Conclusion.
In an era marked by widening income disparities alongside absolute poverty, Zakath offers a principled framework rooted in accountability, ethical ownership, and social responsibility. Its design—targeting accumulated surplus rather than productive effort—encourages circulation of wealth and discourages idle hoarding.
If properly understood and diligently implemented, Zakath is not merely a seasonal obligation observed in Ramadan, but a transformative institution capable of uplifting communities and reinforcing moral economics throughout the year.
The uncomfortable reality is that many involved in the collection and disbursement of Zakath tend to view it solely as a ritual religious obligation, rather than as a profound social responsibility with transformative economic implications. As a result, millions in Zakath funds collected annually are often dispersed in small amounts among thousands of recipients without proper assessment, feasibility analysis, structured planning, or systematic follow-up. Please refer to the article published in Daily FT under “Zakath and poverty: Why the Powerful Tool Falls short in Sri Lanka? (https://www.ft.lk/columns/Zakath-and-poverty-Why-the-powerful-tool-falls-short-in-Sri-Lanka/4-782124)
Consequently, the immense potential of Zakath as a sustainable tool for poverty alleviation and social justice remains underutilized. If it is to achieve its true purpose, the Zakath distribution framework must evolve—from mere consumption to productive investment, and from short-term relief to long-term empowerment. Only then can Zakath fulfil its role as a catalyst for dignity, self-reliance, and equitable social development.
