Corporate social responsibility : [corporate social responsibility and Zakah]

Fatawa Question

Dear Sheik Monzer Kahf, Assalamualaikum Warahamatullahi Wa Barakatuh I trust that you and the family are in the best health and happiness by the Grace of Allah. I have written a short article to explain both Zakah and CSR. After referring to a number of articles including yours papers. This year, every company is mandated to pay 2 % on their book profits as CSR Fund (Corporate Social Responsibility), which will be channeled to organize socio-economic programme in Mauritius. Some Islamic associations are authorized to collect these fund. The problem : A number of businessmen paid to these organizations, and mention the following : This is my Zakah fund, and I want you to give a receipt and consider this as CSR Fund. I learnt from another businessman that the organization is encouraging them to do this as well on the basis they have nothing to do with the person action. First, I would seek your opinion on the above. The article will be published in local paper. The article is an attempt to explain and indirectly make an appeal to the local government to consider the deduction of Zakah from CSR ? Jazaka Allah Khair, Zakah and CSR explained ! Can one consider Zakah as CSR Fund or vice versa ? This is an interesting and somewhat puzzling debate that many Muslim businessmen are engaged in today. To start with, Zakah is one of the five pillars of Islam and a compulsory levy on wealth and income, once they exceed a certain amount termed Nisab (the minimum amount liable to Zakah). It is therefore considered as one the acts of worship in Islam which has economic and social ramifications. There is a clear distinction between Zakah, tax (including income tax) and Corporate Social Responsibility Fund (CSR). Tax is based on a contractual relationship between a state and an individual or a company, whereby taxes are paid in exchange for services provided by the state such as security and other public services. CSR on the other hand, is a mandatory policy for Companies to pay 2 % of their book profits towards programmes aimed at the social and environmental development of the country. However, one of the common misconceptions is today that Zakah is charity. Charity is a voluntary act while according to the Qur’an Zakah is a right of the poor on the wealth and income of the rich. It is not a charged income as is the case for tax, but a purification exercise of one’s wealth as a religious duty and obligation. It is worth noting that the payment of tax does not discharge one of the duty to pay Zakah. In some jurisdiction such as Malaysia, the amount paid as Zakah is deductible from income tax. This creates equality between Muslim Zakah and income tax payer and non-Muslim income tax payer. Of Zakah can be claimed as a tax deductible expense. In Saudi Arabia, non-Saudi corporations are subject to in addition to the corporate income tax at a rate of 20 %, while all Saudi companies are subject to Zakah only at the rate of 2.5 % of their equity. The argument whether the argument whether Zakah amount paid to authorized non-profit organizations should be deducted from taxes is based on the principle of justice that requires the state to treat all its citizen evenly. Can be substituted for Zakah is mainly discussed in an Islamic state and where the Muslim government is justly or unjustly collecting taxes. As regards CSR, one may argue that it has some common goals with Zakah. However, distinction has to be made between Zakah and CSR since besides apparent similarities there are a number of differences between them ? The main distinctions are: first, one of Zakah’s essential features is that the specific intention of fulfilling Zakah (an act of worship) is obedience to God. In Islam, one will eventually be judged according to his / her intention But the historical experience of Muslims since the time of the Prophet, PBUH, has been that it is always collected and distributed to qualified recipients by the government while individuals are still required to distribute it on their own if the government does not undertake the collection and distribution of Zakah. Second, Zakah has its own specific class of recipients as defined by God. It includes eight categories; the poor, the needy, those employed to collect Zakah, those whose hearts are to be won, the captives who need to be liberated, those in debt, the wayfarer (e. g. a poor displaced person traveler or one seeking knowledge). It clearly appears that Zakah has spiritual and ethical objectives in addition to its socio-economic aims. Therefore, although CSR program is aimed at improving socio-economic conditions it cannot be assumed that Zakah and CSR have the same objectives although they overlap when the funds is used to support the poor and needy. There are several major issues that arise when considering the distinction between Zakah and CSR and whether CSR can be considered as a substitute to Zakah. Some of these issues are : . Although it is common belief that the distribution of Zakah is only for Muslims, a number of Muslim jurists, including Sheikh al-Qaradawi agree with the permissibility of giving Zakah to non-Muslims. Dr. Monzer Kahf, a prominent Muslim economist argues that the Qur’anic verse does not confine the category of poor and needy to Muslims. Hence, according to him Zakah may be given to Muslim as well as non-Muslim poor and needy, of course the severity of poverty and need would be a determining factor in priority of distribution. .According to Muslim Scholar Ibn Khathir, Allah mentioned the expenditures of Zakah in this verse, starting with the Fuqara' (the poor) because they have more need than the other categories, since their need is pressing and precarious. Should the CSR program from Zakah fund be categorized in the same order if it is recognized by the government ? It is worth noting here that seven of the eight categories mentioned include some form of poverty and need, the only exception from poverty is the salaries of workers who are hired on their merits not poverty and paid market rates. However this category is restricted to a maximum of one eighth of the distribution non-poor too. . CSR is levied on 2 % on book profits, whereas Zakah computation is essentially a percentage of wealth and saved or retained income with certain more details when it comes to livestock and agricultural produce. Differs from business to business. For business working capital, gold and cash, the rate is 2.5 % per lunar year. For Agricultural produce, a 5 % produce in case of irrigated land and a 10 % of produce from rain fed land is charged as Zakah rate. Paragraph 24 of the Bank of Mauritius’ Guideline for Institutions conducting Islamic Banking Business states that an Islamic Bank Institution shall disclose obligations towards the payment of Zakah as a business entity. Additionally, it shall disclose the Zakah obligations it is required to meet in pursuance of any authorization given to it in that respect by the shareholders or depositors. If an Islamic Financial Institution follows the Gregorian solar year, then this rate is uplifted by 365 / 354 x 2.5 % = 2.5775 % per solar year. Most of the funds held by Islamic banks, including cash are subject to the Zakah due on trading assets. The benefits and objectives of Zakah are not specifically mentioned in the Quran. It only states that the objective of taking Zakah out of wealth is purification and sanctification. Yet, the main objective of Zakah towards the achievement of socio-economic justice is not disputed because it is apparent from the use of funds and categories of recipients as stated in the Quran. Although the last point above shows that the reaping benefits to the community are more than CSR contributions, but the argument of extending Zakah to socio-economic infrastructure through the CSR is a moot point. It is for approved Zakah Institutions to address this delicate issue. But to start with, the urgency of the local government to recognize Zakah paid to authorized Muslim organizations as a deduction from the CSR as a substitute or deduction to / from Zakah is the way forward.

Fatwa

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Publication Date

2010-07-27

Main Subjects

Financial and Accounting Sciences
Religion
Islamic Studies

Topics

• Islamic jurisprudence
• Social responsibility
• Profits
• Expenditure
• Nonprofit organizations
• Corporations
• Alms tax
• Distribution(Economic theory)

No. of Pages

4

Data Type

Fatawa

Language

English

Record ID

BIM-734171

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