Economic Benefits of Zakat on Stocks


Salman Ahmed Shaikh

Some Islamic scholars opine that investment in stocks should be subject to wealth Zakat and capital gain/dividend income from such investments must also be subject to wealth Zakat. The economic effect of such a ruling is that it creates no incentive to invest over keeping one’s money in cash. If we look at Maqasid-e-Shariah i.e. objectives of Islamic teachings, Allah wants exactly the opposite of holding excess money in one’s hands without using it (Chapter Hashr, Verse 7).

The mainstream understanding of Zakat on stocks also creates another anomaly. Whereas, a producer/manufacturer is given exemption from Zakat on means of production, means of earning income for other productive investments should be dealt similarly for want of consistency.

Investment in some business ventures directly or indirectly (through shares) should be assumed as means of earning income and hence, it should be exempt from wealth Zakat. The gains from such investments i.e. capital gain/dividend income should be subject to income Zakat i.e. “Ushr”. Below, we discuss whether  this viewpoint is valid from Shariah perspective or not.

Production is not limited to agriculture nowadays, but the major part of it is coming from industries as well as services sector. Therefore, industrial production could also be taxed just like agriculture. Services income could also be taxed on the same principle.

Concept of ‘Ushr’ can be applied in industrial production on the premise that produce from rain fed land was taxed at 10% and produce from irrigated land was taxed at 5% during Prophet’s (pbuh) time. Some recent scholars argued that rain fed land uses primarily labor as a factor of production; whereas, irrigated land uses both labor and capital. Thus, production from industries employing both labor and capital can be taxed at 5% and those employing only labor or capital can be taxed at 10%.

Muhammad Akram Khan, a contemporary scholar stated that investment in stocks should be interpreted as any other investment with some means of earning income.

Investment in stocks is a means of earning dividend or capital gains. Just like means of production/income are exempt from Zakat, investment in stocks should be exempt from wealth Zakat since investment in stocks means that the money is not kept idle, rather it is invested and even its value could reduce to zero or increase by a long way theoretically.

Therefore, any income arising from investment in stocks i.e. capital gains or dividend income must be subject to income Zakat i.e. “Ushr”. Similarly, this argument could be extended to introduce income Zakat on income from investments in mutual funds, debentures, bonds and other saving schemes.

Furthermore, if a real estate is leased, it becomes means of earning rent. Hence, income Zakat i.e. “Ushr” could also be introduced on rental income on houses, assets and buildings. In all such cases, the invested amount or the value of asset leased will not be subject to wealth Zakat.

It is to be noted that income Zakat has two variants, i.e. ‘Ushr’ (10%) and ‘Khamsa’ (5%). If investment is made in a business venture as a sleeping partner or by purchasing common stock of the company, then the participation in the business venture is only by way of providing capital. Hence, it is appropriate to levy ‘Ushr’ on income from investment in stocks which arise in the form of capital gains or dividend income.

However, if employees/directors are given bonuses in the form of stock ownership or if they already own stocks, they will have to pay ‘Khamsa’ (5%) on income from investment in stocks which arise in the form of capital gains or dividend income accruing to them in their separate capacity. It is due to the fact that in this case, the participation in the business venture is not only by way of providing capital, but also by providing labor (physical/mental exertion by contract for consideration in the form of wage/salary). One crucial advantage to this is that the directors will be internally motivated for working towards the growth and profitability of the firms employing them. This can also help in potentially solving the agency problem as well.

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About Salman Ahmed Shaikh

PhD Scholar in Economics and works as GRA at UKM, Malaysia. He can be contacted at: salman@siswa.ukm.edu.my
This entry was posted in Articles on Islamic Economics and tagged , , , , , . Bookmark the permalink.

One Response to Economic Benefits of Zakat on Stocks

  1. zakat facts says:

    Thanks fr the very nice information. I just want to reconfirm to my Islamic scholar.

    Like

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