ZAKAT AND TAX TREATMENT. HJ MUSA BIN OTHMAN Honorary Secretary Malaysian Association of Tax Accountants (M.A.T.A)

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1 ZAKAT AND TAX TREATMENT HJ MUSA BIN OTHMAN Honorary Secretary Malaysian Association of Tax Accountants (M.A.T.A)

2 INTRODUCTION Zakat - or alms-giving. The practice of charitable giving by Muslims based on accumulated wealth. - obligatory to all Muslims who are able to do so - It is considered to be a personal responsibility for Muslims to ease economic hardship for others (especially the unfortunate) and eliminate inequality.

3 Taxation a fee charged (levied) by a government on a product, income or activity. to finance government expenditure especially to finance public goods and services. Income Tax a charge imposed by government on the annual gains of a person, corporation or other taxable unit derived through work, business pursuits, investment and other services determine in accordance with the Income Tax Act 1967.

4 In Malaysia, a Muslim has to make two compulsory payments on the same source of income every year, namely income tax and zakat. Zakat is obligatory on the Muslims while Income Tax is a civil obligation as a Malaysian citizen. Zakat is obligation to Allah while Tax is obligation to the Federal government

5 Failure of zakat compliance will be held as debt to Allah, and this debt is due forever until fully paid. Failure of tax laws will cause difficulties to the defaulter, of which the deterrent factors include monetary penalty and jail term. Due to the dual system, many may end up double their tax dues while a few use the facility to avoid or reduce tax liability.

6 ZAKAT AND TAX TREATMENT MUSLIM INDIVIDUALS Muslim individuals in Malaysia are very much fortunate as under Section 6A(3) of ITA, any amount paid for religious duty, which include zakat al-mal (on wealth) and zakat fitr, is given rebate as per actual amount expended. Zakat paid in year 2012 can be claimed as tax rebate in income tax return form for year assessment 2012). Rebate is a privilege and special incentive provided by the government to lift the tax burden of a resident taxpayer Rebate is a deduction from tax payable - This was effective from YA 1978

7 Types of Rebate 1. TAX REBATE FOR INDIVIDUAL An amount of RM 400 For Resident Individual With Chargeable Income Less Than RM35,000 Sec 6A(2) 2. ZAKAT OR FITRAH A rebate subject to the maximum tax charged - Sec 6A (3)

8 This means that, if the individual pays zakat of RM5,000.00, he/she can deduct the actual RM5,000 amount that he/she pays for zakat during the assessment year, from the amount of tax that he/she is liable to pay for that particular assessment year

9 Example 1 : For the year ended 31 December, 2012, Ahmad received annual salary of RM60,000. His wife is not working and they have four school-going children. In February 2012, Ahmad paid RM2, for zakat on income. Therefore, income tax calculation for Ahmad: Total income 60, Less: Personal relief 9, Spouse relief 3, Children relief 4, Taxable income 44, Tax on the first RM35,000 1, Tax on the remaining RM 12% 1, Total tax payable 2, Less: Zakat rebate 2, Tax payable

10 1. If zakat paid is less than tax payable then the balance must be paid to IRB. 2. If zakat paid is more than tax payable then the difference cannot be claimed from IRB Sec 6A(4)

11 Example 2 : In Example 1, if Ahmad paid RM3, for zakat on income. Therefore, income tax calculation for Ahmad: Total income 60, Less: Personal relief 9, Spouse relief 3, Children relief 4, Taxable income 44, Tax on the first RM35,000 1, Tax on the remaining RM 12% 1, Total tax payable 2, Less: Zakat rebate (LIMITED) 2, Tax payable NIL

12 B. FOR OFFSHORE COMPANIES Zakat on business income paid by the Labuan offshore companies is also given as an Income tax rebate. This rebate is equivalent to the amount of business zakat paid to the religious authority. It is subject to a maximum of 3% of net profit or RM20,OOO which effective from the assessment year of 2004 C. FOR COMPANIES For company, effective from YA 2005, the Government had allowed the amount of zakat paid by a company is to be treated as deduction of up to 2.5% of the Aggregate Income Sec 44(11A)

13 Example 3: Azam Sdn. Bhd. recorded a statutory income of RM50, for the year ended 31 December, Losses which was not deducted from last year s income is RM10, In November 2012, the company paid zakat on business of RM1, Tax calculation for YA 2012 for Azam Sdn. Bhd. is shown below: Business statutory income 50, Less: losses carried forward 10, Aggregate income 40, Less: Zakat on business (limited to 2.5% of RM40,000.00) 1, Total taxable income 39, % 7,800.00

14 D. FOR COORPERATIVES, TRUST BODIES AND SOCIETIES In order to accord equal tax treatment between companies and trust bodies, zakat settled by cooperatives, trust bodies and societies is also allowed as a tax deduction up to 2.5% of the Aggregate Income. It is effective from year of assessment 2007 E. FOR LIMITED LIABILITY PARTNERSHIP (LLP) Limited Liability Partnership (LLP) is an alternative business vehicle regulated under the Limited Liability Partnerships Act 2012 which combines the characteristics of a company and a conventional partnership. Zakat paid by LLP is also treated as tax deduction up to 2.5 % of the Aggregate Income

15 CONCLUSION Zakat paid to the State Zakat Authorities are treated favorably by the Inland Revenue Board (IRB). The net effect is that, the total tax payable is reduced when there is zakat paid during the year of assessment. However, the zakat must be paid to an appropriate religious authority established under any written law or any person authorized by such religious authority. Sec 44(11A) Tax payer must also obtain and keep original receipts for future references.

16 God is He who knows best Wabillahi taufik wal hidayah Wassalamualaikum warahmatullahi wabarakatuh Thank you