Thursday, July 09, 2009

BUSINESS ZAKAT AND TAX DEDUCTION

Zakat on business income paid by the Labuan offshore companies has been 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 RM20,000 which effective from the assessment year of 2004.
This practice is however not applicable to zakat on business income paid by other companies until assessment year of 2005. Thereof, zakat paid by companies is allowed as a deduction subject to a maximum of 2.5% of the aggregate income excluded zakat paid by cooperatives and trust bodies. In order to accord equal tax treatment between companies and trust bodies, zakat settled by cooperatives and trust bodies is also allowed as a tax deduction. It is effective from year of assessment 2007. This is to be effective via section 44(11A) of the Income Tax Act 1967.

Actually, data used for business zakat accounting method and business tax deduction is difference. Business zakat accounting uses data from the balance sheet,
while business tax deduction gains information from the income statement. In other word, those methods demonstrate none relationship between business zakat accounting method and tax on business income due to the different sources of information usage.

The arising question here is, if the business zakat accounting depends on those methods, do entrepreneurs get benefits from the tax deduction allowable to them?

Principally, zakat is payable on the business irrespective of whether business operation running at loss or profit, if the business has positive working capital. The entrepreneurs would not utilize their benefits in two situations. The first situation is when their business suffers a loss but still has a positive working capital. The second situation is when tax deduction is smaller than the amount of business zakat paid.

In this case, what modification or adjustment should be done? It actually requires the harmonization between fiqh and law that was currently practiced in Malaysia. According to the Mufti of the Selangor State Government, Islamic scholars should be opened to new interpretations and changes of the hokum made which were formulated by earlier scholars especially in matters related to zakat. In fact, any changes to the section 44(11A) of the Income Tax Act 1967 requires a lot of deliberations.

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