Do I Need to Pay Zakat on My Mudaraba and Murabaha Investments If I Haven’t Received the Profit or Principal?

Answered by Shaykh Muhammad Carr

Question 

We are a group of business partners with differing roles and financial arrangements, and we seek clarification on the proper calculation of Zakat in our situation:

1. Our business has multiple partners with varying profit-sharing ratios (e.g., 40/40/20) and differing equity contributions (e.g., 37.5/37.5/25). One of the partners is a sleeping partner with a larger capital investment. In such a case, should Zakat be calculated based on each partner’s share of the profits or their share of the equity?
2. Each partner observes a different Zakat due date (e.g., in Muharram, Ramadan, or Dhu al-Qa‘da). Should each partner calculate and pay Zakat individually on their respective dates? If so, does this require the business to assess its Zakatable assets, such as inventory and cash, multiple times per year? Alternatively, is it permissible or preferable for all partners to adopt a single Zakat date?
3. Is Zakat on inventory to be calculated at its retail price? Are expenses such as advertising costs and staff salaries deductible before calculating the Zakat amount?
4. Lastly, our business receives daily sales returns (Cash on Delivery), but the amounts are often confirmed only after a delay of 2–7 days. Should Zakat be calculated based solely on the inventory and assets that are currently available at the time of assessment, or should expected returns also be included?

ِAnswer

In the Name of Allah, the Most Merciful and Compassionate.

May Allah reward you abundantly for your commitment to fulfilling this sacred obligation. Zakat is one of the fundamental pillars of Islam, emphasizing both spiritual growth and social responsibility. Allah says, “Take from their wealth ˹O Prophet˺ charity to purify and bless them, and pray for them—surely your prayer is a source of comfort for them. And Allah is All-Hearing, All-Knowing.” [Quran, 9:103]

1)    Zakat is calculated based on each partner’s share of the equity. For zakat purposes, the collective investment is considered in terms of the minimum taxable amount based on the rule of khalta. The rule of khalta in Zakat refers to the mixing or partnership of wealth between two or more individuals in such a way that their combined wealth is treated as one entity for the purposes of Zakat.

The Prophet (Allah bless him and give him peace) said, “One should not combine what is separate, nor separate what is combined, out of fear of (paying) Zakat.” [Bukhari]

Note that the share of profits must be based on capital contribution, and discrepancies are not permissible. Imam Nawawi says, “Profit and loss must be distributed in proportion to the capital contributions, regardless of whether the partners contribute equally in terms of labor. If the partners stipulate otherwise, the partnership becomes invalid.” [Nawawi, al-Minhaj]

2)    The partnership’s Zakat year is independent of the individual’s personal or other assets. When the lunar year passes for the business, the Zakat due must be calculated and paid. In the Shafi‘i School, different wealth classes generate their own lunar years. Even in the same class as trading, profit is generated in its own year, independent of the primary goods sold.

Since the partnership’s value is typically above the minimum Zakat threshold (nisab), each partner must pay 2.5% on their respective share, regardless of its individual value. However, if the partnership’s total value falls below the nisab, each partner must assess their Zakat obligation by considering their share in addition to their other Zakatable assets, such as cash.

3)    Zakat on inventory is calculated based on its current value. Expenses such as advertising costs and staff salaries may be deducted, provided they are paid before the zakat due date (zakat anniversary).

4)    Zakat generally applies to accounts receivable but only on the portion considered a confirmed and collectible debt.

I pray this is of benefit, and Allah guides us all.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door for students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari’ah Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.