Zakat on Rent and Share: Economics in Transition

qnaa  If zakat is being regularly paid on the rental income from a building, is it necessary to pay it also on the commuted value of the building?

 If a plot of land was purchased few years back for the purpose of resale/development. Zakat was also paid on the purchase value. Due to some reasons the land stayed there as such without any development for few years. It there the need to pay zakat on the value of the land year after year.

 Suppose we have invested funds (on which zakat have been already paid) in few companies. Is it not sufficient if zakat is paid on the profits/dividends earned from these investments, during subsequent years?
 Do we have to pay zakat on dead investments, year after year?

 Can we use zakat money to repay debts along with interests accrued?

When Zakat was made a mandatory social and ethical institution in the Quran and in the traditions of Prophet Muhammad, what the texts addressed was an agrarian economy. So, principally, there were crops, treasure and property (chiefly jewels and ornaments) and livestock which came under the purview of Zaakat. The socio-economic situation that emerged after industrialization paved the way for many new forms of wealth and money, which helped the jurists address the issue creatively (though not satisfactorily, in the opinion of some scholars). Chiefly, they derived rules from the spirit of the Quran when the holy text prescribed Zakat (ijthihad) and from the spirit of preceding generations, including the generation of the Prophet, when they interpreted the Quran as per their socio-economic situations.

The questions of investment, stocks, rental income and capital came to later addressed by classical legal scholars, including Ibn Qudamah (in his al Mughni) and Ibn al Himan (in his Fatah al Qadir) etc. These scholars have made remarks on the near-contemporary social economic order, one of which is cited below:

“Obligatory Zakat on assets that don’t grow leads to depletion of such assets by zakat payment year after year, knowing that zakat payer has other obligations, too. Thus the condition of the passage of year for growing assets is meant to allow these assets to have sufficient time to grow and yield profits.” (Quoted from Kitab al Zakat, Volume II Yusuf al Qardhawi)
In the paper ‘Zakat: Drawing Insights from Legal Theory and Economic Policy from Islamic Jurisprudence’ submitted by Russell Powell, Associate Professor of Law, Seattle University, which studies the history and present of the institution makes the following remark, which we think is relevant to the questions addressed here:

“The main default rate for all other taxable goods is 2.5% of the value. For short-lived goods like livestock, this may function as a form of income tax [a tax on the flow of assets (a change in stock)] as it does for crops. For durable goods, this functioned as a kind of wealth tax designed to encourage active business investment in production and trade.” Powell makes this comment based on his reading of Sahih al Bukhari, The Translation of the Meanings, Dr Muhammad Muhsin Khan, 1997.

Based on the above two textual references, we can make the following inferences on the questions addressed here:
1. The building is part of durable goods which grows (yields income). So the yearly evaluation should take into account the value of building and the rent. (See the second reference)

2. For want of growth in business, zakat need not be paid on the value of the land (dead) year after year. However, in the context of real estate business, land lying vacant amounts to be business (hidden business/ghayb). If the owner means to make it a real estate property, he needs to pay zakat on the value per year (If the value goes up). Otherwise, he is not supposed to pay, as he is not responsible for the fluctuations of the value. Until he starts his own business, the land will be considered as dead. (See the first reference above)

3. Zakat needs to be paid on the profits/dividends (which grow) from the investments. (see first reference above)

4. Zakat should not be paid on dead investments. . (see first reference above)

5. One of the beneficiaries of zakat is someone constrained by debt (Quran 9:96). Though interest (though not necessarily the bank interest- http://islaminteractive.info/content/bank-interest-contested) is an extraneous category in the Islamic economy, it is an exigency from which a debtor can’t escape in today’s economic system. So she can relieve the debtor (or herself) from her debt and interest therefrom from the zakat fund.

Modern scholars, including some Salafi scholars, have opined that zakat is tax (though it carries with it spiritual and ethical connotations) and it is imposed by state. It is meant to alleviate poverty and bring to fore a just, balanced social and economic order, for whose formation a particular state is responsible. Even in some Muslim countries (including Egypt) zakat is not mandatory. However, there are countries like Jordan and Kuwait, where zakat is established as fund under the Ministry of awkaf. Read what Fazlur Rahman says about it:

“The zakāt is [not for the rich but] only for the indigent and the poor, those who collect the tax, those whose hearts are to be won over [for Islam], for [ransoming] warcaptives, for the relief of those who are in chronic debt, for the “cause of God” [jihād and social welfare purposes like education and health] and for the wayfarer [facilitating travel]. These categories of expenditure, including social welfare in a wide sense and comprising relief from chronic indebtedness, wages for the administrative service (tax-collectors), diplomatic expenditure (“for the winning of hearts”), defense, education, health, and communications, are so broad that they comprise all the activities of a state. Yet, the Muslims came to understand these functions characteristically narrowly under a hidebound tradition, and zakāt became, in the course of time, necessarily defunct.”

On the assumption that the questioner separate zakat from tax, we make the following the comment, too:

The questioner must be paying at present towards tax the commuted value of building. He has already paid zakat as well as, perhaps, tax on the invested funds. So, he can exempt himself from further payment in the form of zakat on the basis of the above observation. But, in that respect, he will not have to pay zakat at all, as he must be paying income tax. The point is that the tradition has instituted the concept of nisab (benchmark) for it to be mandatory for someone to pay the tax. The rationale for nisab is not to constrain a person by the obligation of zakat, which would deplete his income. Though the nisab is fixed (143.3 grams in silver) in the jurisprudence, we understand that it will change according to time and space. And, it would be good, if we take nisab as a criterion for one not to be constrained.

We have already said that zakat has ethical and spiritual dimension. That is the reason why it is emphasized further with the sadaka. To purify one’s wealth, one should spend to her satisfaction as long as one is not constrained.