ZAKAT IS OBLIGATORY ON HUMAN BEINGS, NOT ON COMPANIES
ZAKAT IS OBLIGATORY ON HUMAN BEINGS, NOT ON COMPANIES
By
Tun Abdul Hamid Mohamad[1]
(For those who are prepared to read and dare to think.)
(I know that on the issue of whether companies are obligated to pay zakat according to Sharia, it is likely that I am standing alone against all the great Islamic scholars and Sharia academics in the world. But, we are discussing about reasons for the opinion, which in this case, include not only Sharia but also common law and statutory law which may not be the area of expertise of the Sharia scholars and Sharia academics. Besides, in deciding a fatwa, like deciding a case, getting the facts right is as important as getting the law right. That is still not the end of the matter. It also calls for the right application of the right law on the right facts. Considering these factors, perhaps it is excusable for me to give my view based on my arguments, on this issue.
There is another reason why I say a fatwa is like a judgment. A judgment, like a fatwa, is not a good judgment simply because it is liked by most people or it makes the judge popular. It is one which is the result of logical arguments and valid reasons based on the facts and the law, irrespective of the outcome. At least, that was what I believed and practised as a judge.
I am sure most readers have heard of the fatwa and the opinion that it is obligatory for companies to pay zakat, but not many have read and thought deeply on the reasons thereto.
So, when reading this article, I hope readers will pay greater attention to the arguments for and against on each point, whether they are valid and logical and make their own judgment on the issue.
The issue of whether companies are obligated to pay zakat according to Sharia is universal. In Malaysian context, there is another aspect to it, that is, the legal aspect. I believe that very few readers, if at all, had seen the arguments that I have put forward here on the provisions of the Constitution and the law on the issue and the effect thereto, which, to the best of my knowledge, no one had discussed.
In this article “zakat” means compulsory or obligatory zakat, one of the Five Pillars of Islam, not voluntary gifts.)
The first time I touched on the issue of a company’s obligation to pay zakat was in the 1980s at a seminar held in Kuala Lumpur. I said that a company is not a Muslim. It has a separate legal personality from its shareholders. Therefore, it is not obligatory to pay zakat. During the coffee break, a participant said to me, “Behind every company, there are people.”
In 2012, I wrote an article entitled “Obligation of companies to pay zakat: issues arising from effects of separate legal entity”. My intention was to comment on the basis of the opinion issued by the Muzakarah Committee of the National Council for Islamic Religious Affairs of Malaysia (Muzakarah Committee), the fatwa issued by the Selangor Fatwa Committee that companies must pay zakat and a research paper written by five Syariah academics (all Ph. D holders and three of them professors) and papers at two conferences that gave a similar opinion.
After that I wrote several articles, among them looking at the issue from the point of view of the Constitution and the law. I am now placing all the arguments of both sides on this issue together so that it is easier for readers to follow and make their own decisions.
This discussion focuses on companies established under the Companies Act 2016 and corporations established under particular laws such as Tabung Haji and Amanah Saham Nasional Berhad (ASNB), all of which will be referred to in one word, “company”.
A company established under the law is recognized by law as having a separate legal personality from its shareholders. This principle was decided by the unanimous judgment of the House of Lords in England in the case of Salomon v. A. Salomon & Co. Ltd. (1897) AC 22). It has been made law in Malaysia through the Companies Act 2016.
Section 20 and 21 of the Act provide:
“20. A company incorporated under this Act is a body corporate and shall—
- have legal personality separate from that of its members; and”…
“21. (1) A company shall be capable of exercising all the functions of a body corporate and have the full capacity to carry on or undertake any business or activity including—
- to sue and be sued;
- to acquire, own, hold, develop or dispose of any property; and
- to do any act which it may do or to enter into transactions.
(2) A company shall have the full rights, powers and privileges for the purposes mentioned in subsection (1).”
Companies differ from sole proprietorship and partnership to which the principle of separate legal personality does not apply.
Sharia only requires “believers” to pay zakat. The Muzakarah Committee and the Selan
Fatwa Committee rely on verse 267 of Surah Al-Baqarah regarding the obligation to pay zakat, which means:
“O you who have believed, spend from the good things which you have earned and from that which We have produced for you from the earth…”
To make a company a “believer”, Sharia scholars and academics look at the shareholders, whether they are Muslims. If the shareholders are Muslims, then they will attribute the religion of the shareholders to the company and it becomes a “believer”.
If only part of the shareholders are Muslims, only the profit belonging to the Muslim shareholders are liable to zakat.
The Sharia scholars and academics gave another argument why companies must pay zakat. They quoted the opinion of Sheikh Taqi Osmani, a Pakistani scholar, who said that in Sharia too there is the principle of separate legal personality. Examples are mosques, baitul mal and khultah. Then, they made the following conclusion: since the Sharia recognizes separate legal personality, since a company has a separate legal personality, therefore a company is also obligated to pay zakat.
Of late, Sharia scholars and academics used the principle of “lifting or piercing of corporate veil” to make a company a Muslim. By lifting the corporate veil of a company, the religion of its shareholders will be seen. If they are Muslims, they will attribute the religion of the shareholders to the company and the company becomes a Muslim.
To make it easier for readers to follow the arguments of both sides, I will give my comments on the arguments of the other side up to what I have reproduced above.
Regarding verse 267 of Surah Al-Baqarah, I believe it is aimed at human beings who can believe (and become Muslims) and reject faith (non-Muslims). Only people who can believe and had become Muslims are obligated to perform the Five Pillars of Islam, zakat is one of them. Courts and Parliament cannot create human beings who can believe. Only Allah can do it.
How can the verse be said to be addressed to other than humans such as a piece of paper, a building, a goat pen or even a robot? How do they believe or reject faith? Al-Quran is addressed to humans, Messengers (Prophets) are only sent to humans.
If the verse is also addressed to non-humans, why only zakat is obligatory on them, and even that only on companies? Why are the other Pillars of Islam not also imposed on the companies, if they are Muslims?
Attributing the religion of the shareholders to a company is inappropriate. A company is irreligious. How is religion to be attributed to it? A company is not a human being, how could the religion of human beings be attributed to it? It contradicts the principle of separate legal personality itself.
The application of the principle of “lifting or piercing the corporate veil” is inappropriate here. First, only the court has the power to do so in appropriate cases, not by anyone.
Secondly, according to that principle, the veil that is lifted or pierced is the veil of the company, not that of the shareholders. Here they lift the veil of the shareholders to see the religion of the shareholders and attribute it to the company. What they do is the reverse.
Thirdly, the principle is only applicable based on “(i) the concealment principle and (ii) the evasion principle.” The principle is not applicable to the facts of this case. – See Ong Leong Chiou & Anor v Keller (M) Sdn & Ors. (2021) 4 CLJ 821 F.C. For the purpose of this article, it is sufficient to quote part of a sentence in the judgment:
“… if a company’s separate legal personality is being abused for the purpose of wrongdoing, the court is justified in disregarding the corporate personality of the company. ” – Per Nallini Pathmanathan FCJ delivering the judgment of the court.
The principle was created by the court in England to place responsibility on alter-egos, directors, shareholders and others who misuse the separate legal personality of the company for the purpose of wrongdoing, not the other way around.
The argument that since the Sharia recognizes separate legal personality, since the company has a separate legal personality, therefore the company is obligated to pay zakat is non-sequitur (a conclusion or a statement that does not logically follow from the previous argument or statement). Mosque, baitul mal and khultah are not separate legal personalities according to the principle of Salomon v. A. Salomon & Co. Ltd. What legal personality of a company I mentioned earlier does the mosque, baitul mal and khultah have?
Khultah is a method of calculating zakat from mixed property belonging to more than one Muslim persons. For example, two Muslim persons agreed to breed goats, one contributed 60 and the other 40 heads. After one year they did not know whose goats gave birth and how many. So, zakat is calculated on the value of all the goats in the pen and the individual zakat is divided according to the share of the partners, i.e. 60% and 40%. The zakat is the zakat of the two believers, not the zakat of the goat pen. The question of the separate legal personality of a company as decided in the case of Salomon v. A. Salomon & Co. Ltd. is not relevant at all.
Khultah is not a separate legal personality. The principle of khultah cannot be used to impose the obligation to pay zakat on a company.
The principle of separate legal personality is a common law principle that was only created 127 years ago. It is only now that Sharia academics who know the English language and read about it, have started searching whether there is such a principle in Sharia. Please advise me if the Sharia scholars had used the term before Salomon v. A. Salomon & Co. Ltd was decided or even before the Second World War. Even if there is such a principle in Sharia, is it the same as the common law principle? Even if there is and it is the same, it does not make the company obligated to pay zakat, indeed it should be to the contrary.
The Sharia scholars and academics got caught in their argument when they say Sharia recognizes the principle of separate legal personality and then use the principle of lifting or piercing of corporate veil to attribute the religion of the shareholders to the company. Even in so doing, they apply it wrongly: they lift or pierce the wrong veil.
I have no issue if they say that Sharia recognizes the principle of separate legal personality to the extent that it is provided by law. It should not include religious obligations. Muslims can establish companies according to law. It has all the powers given by law. Religious obligations are their personal obligations, imposed by Allah on them. They cannot be transferred to other people or companies. The law that authorises the establishment of companies too does not give a religion to the company or impose religious obligations on it because it is irreligious. Therefore, the obligation to pay zakat, as a religious obligation of the shareholders, remains with them, not transferred to the company. I do not know whether this stance is contrary to Sharia or not.
I will also have no issue if they say that Sharia does not recognize the principle of separate legal personality at all. Therefore, the company is not obligated to pay zakat, whether of its own or of the shareholders. But, if they say this, Muslims will not be able to do business through a company at all. They will be confined to sole proprietorship and partnership.
The opinion that if only part of the shareholders are Muslims, only the profit belonging to the Muslim shareholders are liable to zakat is not free from problems. First, not all shareholders are humans. The big shareholders are other companies. In fact, the shareholders of those companies may also be companies and that may go on for many layers. How do you determine the portion belonging to Muslim shareholders?
Secondly, the profit is that of the company. Until dividend is declared, we do not know how much is the portion of the Muslim and non-Muslim shareholders.
There is yet another opinion expressed by a Sharia academic: a company is not obligated to pay its shareholders’ zakat but if it makes its own profit, the company has to pay zakat on it.
I have no problem with the first half of the opinion. That is what I have been saying all along. But there is a problem when you say if the company makes its own profit, it must pay its own zakat. Because, when you say that, it means that you accept that the company has its religious obligations. We are back to square one: is the company a Muslim?
The company pays zakat on behalf of its shareholders
To avoid the argument that a company is not a Muslim person, therefore not obligated to pay zakat, it is said that the company pays zakat on behalf of its shareholders. Remember what the participant at the conference told me 50 years ago.
My arguments that a company is not obligated to pay other people’s zakat are, first, if a company is not obligated to pay its own zakat, how could it be obligated to pay other people’s zakat? A father who is obligated to pay his own zakat is not obligated to pay his son’s zakat. The Pillars of Islam are obligatory on individual believers to perform for themselves, not on them to perform for others.
Secondly, regarding zakat on dividend, the shareholders are only obligated to pay their zakat after they have received the declared dividend. Before they receive it, they are not obligated to pay zakat on the dividend. If a company is not obligated to pay its own zakat, why should the company be obligated to pay the shareholders’ zakat? It may be that for the year in question the dividend is not declared at all. It means that there is no zakat on dividends for the shareholders to pay that year. What does the company pay?
Thirdly, until the dividend is declared and paid to the shareholders, how does the company know how much is the dividend earned by each shareholder? If not, how is their zakat calculated?
The company pays the shareholders’ zakat with the company’s own money. Is this not similar to using the company’s money to pay the debts of the shareholders? Is this allowed?
Shares of companies listed on Bursa Malaysia are traded daily and change hands frequently. How is haul and the percentage of Muslim shareholders determined?
Companies’ obligation to pay zakat according to the Constitution and the law.
Let us begin with the Constitution. List I, Federal List, Paragraph 8(c) places companies under the Federal jurisdiction to make laws. Paragraph 1, List II, State List, Ninth Schedule places zakat under the jurisdiction of the States to make laws. The paragraph also places the “creation and punishment of offences by persons professing the religion of Islam against precepts of that religion, except in regard to matters included in the Federal List” under the jurisdiction of the States. Both the Federation and the States cannot make laws on matters within the jurisdiction of the other.
The paragraph also allows the States to make laws to establish Sharia courts that have jurisdiction only over “persons professing the religion of Islam”. – List II, State List, Schedule Nine.
The effect is that the Federation cannot make laws to require companies to pay zakat because zakat is under the jurisdiction of the States. States cannot legislate to make companies pay zakat because companies are under the jurisdiction of the Federation. That is why there is no law, Federal or State, that requires companies to pay zakat. Besides, there is no law that makes it a punishable offence if a company does not pay zakat. If there is, the offence cannot be enforced against companies because the Sharia court does not have jurisdiction over companies because companies are not “persons professing the religion of Islam.”
Therefore, a company cannot say that it pays zakat, for itself or on behalf of its shareholders, because it is required by law. I also do not think that there is a company whose Memorandum of Association authorizes it to pay zakat. If there is, it can be challenged as illegal on the above-stated grounds.
Let us now look at the provisions of the State law on zakat. I shall take the Selangor State enactment as an example.
Section 86 of the Administration of the Religion of Islam (State of Selangor) Enactment 2003 (Enactment 1 of 2003) provides:
“Section 86. Power to collect and distribute zakat and fitrah
Majlis is empowered to collect and distribute zakat and fitrah due from every Muslim person in the State of Selangor in accordance with Hukum Syarak on behalf of His Royal Highness the Sultan.”
Note the words “…. empowered to collect ….zakat… due from every Muslim person….” There is no definition of “person”. However, section 2 defines “Muslim” as follows:
“Muslim” means—
- a person who professes the religion of Islam;
- a person either or both of whose parents were at the time of the person’s birth, a Muslim;
- a person whose upbringing was conducted on the basis that he was a Muslim;
- a person who is commonly reputed to be a Muslim;
- a person who has converted to the religion of Islam in accordance with section 108; or
- a person who is shown to have stated, in circumstances in which he was bound by law to state the truth, that he was a Muslim, whether the statement be oral or written;”
Note that in all the subsections, the description attached to the word “person” could only mean a natural person or a human being. It cannot be anything else because, first, only a natural person can be a Muslim or a non-Muslim, a believer or a non-believer;
Secondly, zakat, one of the Five Pillars of Islam, is an obligation on Muslims (who must necessarily be natural persons);
Thirdly, Islamic law, the subject matter of the enactment legislated pursuant to List II (State List) is only applicable to Muslims (who must necessarily be natural persons).
Fourthly, section 21 of Syariah Criminal Offences (Selangor) Enactment 1995 (Enactment No. 9 of 1995) makes it an offence for non-payment of zakat and fitrah:
“Any person who is liable to pay zakat or fitrah but –
- refuses or willfully fails to pay such zakat or fitrah; or
- refuses or willfully fails to pay such zakat or fitrah through an amil appointed, or any other party authorized, by the Majlis to collect zakat or fitrah”….
This provision too could only apply to people (humans) because only they are capable of “refusing or willfully failing to pay zakat.”
Fifthly, section 37 of the same enactment also makes it an offence for any person who collects zakat without authority.
This provision too is only applicable to natural persons who are Muslims for the reasons I have given in discussing section 86 of the Enactment 1 of 2003 above.
The company’s obligation to pay zakat by fatwa.
Now, let us look at fatwa. The Fatwa Committee of Selangor had issued fatwas on obligation of companies to pay zakat. I submit that even if they are gazetted, they have no legal effect on companies because, first, the fatwa is only binding on individual Muslims. Section 49(1) provides:
“(1) Upon its publication in the Gazette, a fatwa shall be binding on every Muslim in the State of Selangor as a dictate of his religion and it shall be his religious duty to the fatwa in matters of personal observance.”
Secondly, the fatwa cannot be enforced against companies because the enactment is made pursuant to the State List which confers jurisdiction to States in respect of the “creation and punishment of offences by persons professing the religion of Islam….” A company is not a person “professing the religion of Islam.”
Thirdly, section 21 of Enactment No. 9 of 1995 is only applicable to individual Muslims.
Fourthly, Sharia Court only has jurisdiction over Muslims.
Note, first, that the subsection uses the word “Muslim” which we have discussed at length to mean human being. Secondly, the context of the provision clearly refers to human beings.
It should be remembered that that the provisions of section 86, 2 and 49 of the Islamic Religious Administration Enactment (Selangor State) 2003 and section 21 of the Syariah Criminal Offenses Enactment (Selangor) 1995 were enacted that way because List II, the State List empowers the State to make laws for the “creation and punishment of offences by persons professing the religion of Islam.”
Tax rebate
After paying the shareholders’ tax, the companies apply for tax rebate from the Inland Revenue Board (IRB) and the IRB pays the companies. Is this allowed by law?
Section 6A(1) Income Tax Act 1967 provides:
“6A. (1) Subject to this section, income tax….of every individual resident…shall be rebated…. in accordance with subsections….(3)….”.
“individual” is defined in section 2 as follows:
“”individual” means a natural person;”
Section 6A (3) provides:
“(3) A rebate shall be granted… for any zakat, fitrah or any other Islamic religious dues payment of which is mandatory…”
Reading these three provisions together, they clearly mean that rebate for zakat may only be given to human beings, not companies because it is human beings who are obligated to pay zakat, not companies. The question is, what about the millions of Ringgits that have been paid by IRB to companies as rebates for zakat?
Conclusion
Zakat is one of the Five Pillars of Islam which is obligatory on people (humans) who believe (in Islam). Only humans can believe. A company is a corporation established by law made by Parliament. Parliament has no power to make humans who can believe. Only Allah has the power to do so. Therefore, a company cannot believe or reject faith. It has no religion, neither Islam nor other religions. Therefore, the Pillars of Islam do not apply to it. Why only one of them, anyway?
To make a company a believer, the Sharia scholars and academics attribute the religion of the company’s shareholders to the company. How can human religious obligation be attributed to non-humans? It also violates the principle of a company having a separate legal personality from its shareholders. Furthermore, not all shareholders are humans. Major shareholders are companies as well.
The argument that since the Sharia recognizes the principle of separate legal personality, since a company has a separate legal personality, then the company is obligated to pay zakat, is non-sequitur.
To avoid the arguments that a company is not obligated to pay zakat, it is said that the company pays zakat on behalf of its shareholders. Even a Muslim human being who is obligated to pay his own zakat is not obligated to pay the zakat of others, what more a legal personality? That is why the law that requires the payment of zakat and the punishment for violating it is only aimed at humans. That is what the Constitution allows.
There is no law that requires companies to pay zakat, only fatwas. It should be remembered that the Muzakarah Committee’s decision has no legal force. The Committee is not a fatwa committee established under any law.
The fatwa of the Selangor Fatwa Committee is also not binding on companies and cannot be enforced against companies. It only binds human beings who are Muslims. On what basis does the company pay zakat?
After paying zakat, the companies obtain tax rebate from IRB. The Income Tax Act 1967 only allows tax rebates for zakat payments to be given to individual resident which means natural persons, i.e. human beings. The IRB needs to think seriously whether the millions of Ringgits paid to companies as tax rebates is in accordance with law or not.
Starting with the mistake of placing one of the Five Pillars of Islam on a non-Muslim legal personality, we have made many mistakes. I think we need to go back to the starting point: zakat is for Muslim human beings. Collect from them whatever zakat from whatever source they are required by Sharia to pay. Taxes are for companies (as well as human beings). Collect from them whatever tax they are legally required to pay.
20 August 2024
http://www.tunabdulhamid.my
( NOTE:
The Imam of a mosque in New York, a US citizen of Egyptian origin to whom I showed this article in draft, narrated this story to me. “This reminds me of my sister, who with her husband once had a dog. Her husband went shopping one day and returned with a box of crackers among the groceries that my sister noticed was made with lard. When she pointed this out to her husband, he responded that they could give it to their dog. “How can you do that,” my sister interjected, “he’s a Muslim dog!” This was a popular joke with my family for quite a while.
As you pointed out, my sister here imposed her religion onto her dog.)
[1] The author is a former Chief Justice of Malaysia