OBLIGATION OF COMPANIES TO PAY ZAKAT: ISSES ARISING FROM EFFECTS OF SEPARATE LEGAL ENTITY
THE MALAYSIAN LEGAL AND CORPORATE CONFERENCE 2013 (MLCC)
3rd – 4th July 2013
OBLIGATION OF COMPANIES TO PAY ZAKAT: ISSES ARISING FROM EFFECTS OF SEPARATE LEGAL ENTITY
Tun Abdul Hamid Mohamad
(Former Chief Justice of Malaysia)
First, let me make it very clear that I am not challenging the ruling of the National Fatwa Committee and the Selangor Fatwa Committee. (For brevity I am using the word “ruling” to cover both the “decision” of the National Fatwa Committee and the “fatwa” of the Selangor Fatwa Committee.) I am merely trying to understand the basis or the rational of the ruling because it involves applying one out of many religious obligations of Muslim human beings to a non-human “separate legal entity” created by law for specific non-religious purpose, which entity is neither and could never be, a “believer” (Muslim) nor a “non-believer” (non-Muslim) in the Islamic sense.
There is no issue that a free, adult, sane Muslim human being is obliged to pay zakat provided the conditions therewith are fulfilled. That has been settled since the lifetime of Prophet Muhammad s.a.w. But, when you extend a religious obligation to a legal entity created by law for specific non-religious purposes, inevitably you will be faced with new issues. I am aware that “Muslim jurists have often said that a legal personality or entity is recognised for such entities as bayt al-mal, the waqf and mosque.” Even if that is so, the question remains, is the effect of such recognition the same as under the prevailing law? Did those scholars treat the bayt al-mal, waqf and mosques as a Muslim human being subject to all the religious obligations of a Muslim human being? How do you harmonize it with the principle of separate legal entity under the prevailing law?
I do not think that there is any dispute that Allah s.w.t. had sent prophets to human beings and that religion is meant for human beings (not to mention jinn) because it is human beings who could believe or disbelieve, accept or reject faith. So was Prophet Muhammad s.a.w. He did not preach to other than human beings. Human beings, like him, are the ones who could accept or reject Islam and become Muslims or non-believers. I would say, so is the Qur’an. Thus there are numerous verses that begin with “O mankind….” and numerous verses that begin with “O you who have believed…..”.
When they accept Islam then some obligations become compulsory on them, the most obvious examples are what is known as the Five Pillars of Islam consisting of the profession of faith (shahadah), prayers, zakat, fasting and hajj.
Thus, to take as an example, regarding fasting, the Qur’an says:
“O you who have believed, decreed upon you is fasting as it was decreed upon those before you that you may become righteous” – Al-Baqarah 183
On zakat, the following verse has been relied on by the National Fatwa Committee and the Selangor Fatwa Committee and I have no quarrel with that:
“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…….” – Al-Baqarah 267
Note that both are directed at “You who have believed”. Another verse rounds it up:
“Indeed, those who believe and do righteous deeds and establish prayer and give zakah will have their reward with their Lord , and there will be no fear concerning them, nor will they grieve.” – Al- Baqarah 277.
These are obligation on Muslims, people who accept the faith or believe.
What is a “limited company” or to put it the other way, what is this principle of separate legal entity as spelled out in the celebrated judgment of the House of Lords in England in Salomon v. A. Salomon & Co. Ltd. (1897) AC 22 and now codified in the Companies Act 1965? It is a common law principle which has been given statutory recognition.
When a company is established in Malaysia under the Companies Act 1965, by operation of law, it has a separate legal entity as provided by the law for “the purpose of fostering business development by allowing owners to invest in a venture without being personally liable in tort or contract law for the company. Thus, a shareholder or partner’s assets that are subject to recovery in a lawsuit are limited to the value of his or her ownership interest. In order to accomplish this, the law recognizes the entity as a legal person, and it is permitted to own property, enter into contracts, sue, and be sued.” The law does not make a company a Muslim or a non-Muslim.
With that background, let us now refer to the relevant rulings.
First, a word about the National Fatwa Committee. It must be noted that the National Fatwa Committee is not a fatwa committee established under any law. It has no legal standing. Its decisions are not “fatwas” binding on anybody. In the Federal Territories, the fatwa committee having power to issue binding fatwas is the Federal Territories Fatwa Committee established by the Administration of Islamic Law (Federal Territories) Act 1993 (“Federal Territories Fatwa Committee”). The Selangor Fatwa Committee is a legally constituted committee under the Administration of the Religion of Islam (State of Selangor) Enactment 2003 (Enactment No. 1 of 2003)
Both the rulings are clear that a company is obliged (“wajib”) to pay zakat.
The Selangor ruling is quite clear and consistent that the company’s obligation is to pay “on behalf” of the shareholders i.e. the shareholders’ zakat.
The ruling of the National Fatwa Committee is not so clear. The text of the ruling gives the impression that a company is obliged to pay its own zakat. However, in the reasons that follow, it suddenly uses the words “on behalf” (of the shareholders).
Both Committees give the same reasons. Both rely on the same verse of the Qur’an, i.e. Surah Al-Baqarah verse 267: “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….”). Both Committees rely on the same hadith regarding the manner of calculating the zakat when the share of the individual (e.g. partners) are inseparable.
The ruling of the National Fatwa Committee further states: “As for the company shared by Muslims and non-Muslim, only the share owned by the Muslim is zakatable. The zakat is calculated based on the nett (sic) income obtained.” The Selangor ruling is to the same effect. In the case of a listed company, one wonders how that is determined.
How do the Committees arrive at their conclusions?
They assume that behind every company there are human beings (shareholders). They impute the religion of the shareholders to the company. If the shareholders are Muslims, the company is treated as a Muslim and is obliged (wajib) to pay zakat. Where the shareholders are partly Muslims and partly non-Muslim, only the non-Muslim portion (of the net income) is liable to zakat.
First, the Committees fail to make a distinction between a Muslim human being and a company when they apply the obligation to pay zakat to companies. Zakat is one of the five Pillars of Islam (Rukun Islam) which is an obligation (wajib) on individual human beings who believe in the six Pillars of Faith (Rukun Iman) and are, therefore, Muslims (or “believers”). The Five Pillars of Islam do not apply even to human beings who are not “believers” (Muslims) what more to mere legal entities created by (secular) law? How does a company make the profession of faith (shahadah), pray, fast and perform the hajj? In so doing, the Committees give a different treatment to zakat compared to the other obligations. On what basis? For the purpose of zakat alone, they treat a company like a human being. They rely on the Qur’anic verse referred to earlier which is clearly applicable only to human beings who are able to believe or not to believe. Companies are unable to believe or disbelieve in Islam or to choose to be a Muslim or not.
Secondly, the Committees fail to make a distinction between companies and a sole proprietorship or a partnership. In the case of a sole proprietorship or a partnership, it is the Muslim human being owner or partner, as the case may be, who is obliged to pay zakat from his business activities whether in the form of a sole proprietorship or partnership. The principle of separate legal entity does not apply to sole proprietorship and partnership.
Thirdly, the Committees impute the religion of the shareholders to the company: if they are Muslims, the company is a Muslim having the same obligation regarding zakat. That, in the first place, is in breach of the principle of separate legal entity. Furthermore, how do we impute a religion to a non-human being, recognized as a legal entity by law (common law and statutory law) only for specific purpose e.g. limited liability in debt, right to own property, right to sue and be sued etc? Why only for zakat and on what basis? If that could be done, then, through the same process, a company could also be identified according to race and gender, which is absurd.
Fourthly, even if you could impute religion to a company (in my view, no), some big shareholders may not be individual human beings. They could be other companies including such corporations like Tabung Haji, Employees Provident Fund or even Bank Negara. (Is Tabung Haji a Muslim? It is even a “haji”). There could be many layers of such shareholders which themselves have no religion to be imputed to the first-mentioned company.
Whose zakat is the company obliged to pay?
If the obligation of the company is to pay its own zakat, the issues raised in earlier paragraphs are pertinent i.e. is a company an independent, adult, sane, Muslim person capable of believing and disbelieving and with obligation to perform the five pillar of Islam as well as other injunctions besides avoiding what is prohibited?
If the obligation is to pay the shareholders’ zakat, we are placing a higher religious burden on a company than even on a Muslim human being by, first, treating it as a Muslim human being and, secondly, by placing on it the obligation to pay somebody else’s zakat. Evan a Muslim human being does not have to pay another Muslim human being’s zakat.
It is trite law that whatever is earned by a company belongs to the company. The company may or may not declare dividend. If it does, only when the shareholders receive their dividend that they, individually, become obliged to pay zakat if the conditions for zakat are fulfilled, for example, the amount is sufficient to attract the obligation to pay zakat. If until then, the shareholders are themselves not obliged to pay zakat or they are not obliged to pay zakat at all, why should the company be obliged to pay their zakat?
From whose funds the company pays the shareholder’s zakat? Obviously it is from the company’s own funds. Is that proper? Is that not quite similar to a company settling the shareholders’ private debts?
Under the present arrangement, the company is given tax rebate for the zakat it pays. If it pays its own zakat, there is no issue, from the point of view of tax law. But, if the company pays the zakat of the shareholders, is it entitled to a rebate for paying the zakat of the shareholders? Is not a taxpayer, in law, only entitled to a rebate for his own zakat that he pays, not on other people’s zakat even if he volunteers to pay.
The Committees fail to take into account constitutional issues. First, zakat is a State matter while companies are a Federal matter. A State Fatwa Committee may give a ruling on the obligation of companies to pay zakat but the ruling is unenforceable on companies, even if it gazetted. This is because companies are not within the State jurisdiction. Therefore, any State law that makes it an obligation for companies to pay zakat is unconstitutional. Secondly, the constitution only allows zakat to be collected from “persons professing the religion of Islam”. Companies have no religion. To make use of federal law to collect zakat from companies is equally unconstitutional for the same reasons.
1. Zakat is a religious obligation of a Muslim human being, just like prayer, fasting and haj. Whatever zakat that a Muslim human being is obliged (wajib) to pay, from whatever source subject to zakat, is the obligation of the Muslim human being to pay and should be collected from him.
2. A company has no religion. It is neither a Muslim nor a kufur. A company established under the Companies’ Act 1965 is recognized in law as having an identity separate from the shareholders in regard to liability to pay debts, the right to own property, the right to sue and be sued etc. There is no basis for imputing the religion of the shareholders to a company and only for the purpose of paying zakat. It is misplaced to say that a company is obliged (wajib) to pay zakat like a Muslim human being. There is also no basis for treating zakat differently from the other obligations like prayer, fasting and hajj.
3. In Malaysia, a ruling that a company is obliged to pay zakat though gazetted, is not enforceable on companies because, first, under the constitution, a company is not a State matter. Secondly, a company is not within the jurisdiction of the Shariah Court. Thirdly, any State law imposing zakat on a company is void because under the constitution, zakat could only be made obligatory on “persons professing the religion of Islam.” Companies are not.
4. At the very least, it is improper for a company to use its own funds to settle the zakat of the shareholders. It is quite similar to requiring a company to use its own funds to settle the shareholders’ private bills.
5. I doubt that a company is entitled to a tax rebate for paying the zakat of the shareholders.
I think the Inland Revenue Board of Malaysia should start thinking whether it is giving tax rebate to the right taxpayers.
That, in summary, is my comment. If you would like to read a fuller discussion, please visit my website. There is an article bearing the same title, my first article on the subject, which I had uploaded on my website since 18th July 2012 with the hope that someone would write a response to explain the issues raised therein. Even though 500 people have visited it, nobody has done it so far. Instead I received emails form academicians, both locals and foreigners based in Malaysia, saying that they shared the same view. One of them even urged me “to use (my) influence” to have a seminar attended by experts in sharia, law and others to re-discuss the issue.
I do hope that some organizations will pick up the idea of organizing a bigger workshop or seminar to revisit the issue. This is not just a matter of academic interest. It has very wide implications and involves hundreds of millions of Ringgit every year. In the meantime, let me pose some questions for you to think. (These questions are premised on the basis that a company pays the shareholders’ zakat on their behalf.)
1. Suppose a shareholder of a company were to challenge that the company has no right to pay his zakat on his behalf when he had not even received the divided and did not know how much he would receive, if at all and, therefore, he was not liable to zakat yet, what would the response be?
2. Suppose, a shareholder of a company were to challenge the Inland Revenue Board for giving tax rebate to a company for purportedly paying his zakat, what would the response be?
3. Suppose a shareholder of a company were to complain that the company had improperly used its funds to settle personal debts of the shareholders, what would the response be?
4. Suppose the Majlis Agama Islam of the States were to claim that zakat of the shareholders living in their respective States should be paid to the respective Majlis Agama Islam and not to The Majlis Agama Islam of Wilayah Persekutuan, where the registered office of the company is situated, what would the response be?
I think that should be enough for the time being.