Zakat means blessing, purification, growth, and goodness because it purifies the wealth from which it is taken and protects it from misfortunes. Zakat is a determined portion taken from wealth and allocated to the poor, needy, and other deserving people. It is mentioned in the Quran, (Surah Al-Taubah, No.9, Verse: 103): “Of their goods take alms, that so thou mightiest purify and sanctify them; and pray on their behalf, verily thy prayers are a source of security for them.”
In an authentic hadith, the Prophet(PBUH) said to his Companion Mu`adh, when he was sent to Yemen as governor, “Tell them that Allah has made Zakat obligatory for them, that it should be collected from the rich and distributed among the poor.”
Hence, every Muslim who possesses a Zakat-payable amount which is 2.5% for one lunar year has to pay Zakat.
How to Calculate Zakat on Profit:
When it comes to business, the profit and loss account is irrelevant for Zakat calculation. A company may have had a net loss yet it will be subjected to pay Zakat. Zakat is not dependent on profits. So Zakat will be calculated on the current Zakatable assets of a company. Therefore, to calculate Zakat, a company will use the Balance Sheet to determine net Zakatable assets in the company.
If you have a business, all possessions in trade are subjected to Zakat, including land and real estate that has been kept for resale. Raw materials and goods produced for sale are also subject to Zakat. The buildings, machinery, vehicles, etc that are vital for the business are excluded from Zakat. However, you are permissible to deduct any loan you have taken out to acquire Zakatable assets, such as raw materials, goods, and so on. You pay Zakat on what remains.
Zakat has to be paid on the money you have deposited in Islamic Banks. In such a case, Zakat will be calculated on capital money and on the profit. When a whole lunar year passes on the capital money and on the profit, then the Zakat has to be paid.
If you have money deposited in commercial banks that deal with interest and usury the Zakat will be due on the capital money only, and there is no Zakat on interest or the profit. Islam is strictly against taking interests and it is considered as impure money because it is not the property of its owner. You can get rid of this money by giving it to the poor, and it is not allowed to deduct this money from the due Zakat.
Zakat should also be paid on the net profit that you have acquired from mutual funds or shares. So you also need to calculate the Zakatable assets from your mutual business and then pay your share of the Zakat.
Muslims must pay Zakat to the poor and needy so that the gap between the rich and those in need will be narrowed. Zakat is given to make sure that the basic needs of the unfortunate or the needy are met. In this way, Zakat helps to uphold peace and harmony in society. Zakat also aims to reduce the chances of social and economic disparity.
Allah says in the Holy Quran: “And whatsoever you spend of anything (in the cause of Allah), He will replace it. He is the best of those who grant sustenance”. He further exhorts: Establish worship, pay the poor-due (Zakat), and bow your heads with those who bow (in worship).”
In the Holy Quran, the importance of Zakat is mentioned in 82 verses and it is associated with prayer (Salah). The beloved Messenger of Allah (peace be upon him) is reported to have said about Zakat: “Zakat is a (great and strong) bridge of Islam; If a man pays the Zakat due on his property, it causes its evil influence to vanish; Gains the pleasure of Allah; Increases wealth and protects from losses; Causes Allah’s forgiveness and blessings; Protection from the wrath of Allah and from a bad death; A shelter on the Day of Judgment; and Security from seventy misfortunes.”
Zakat is the Islamic contribution to social justice. It is the way to share the benefit of prosperity with those who have fallen short. This is the Islamic approach to remove greed and envy and purify one’s soul based on good intentions.