A Detailed Analysis of Zakat on Inventory and Investments – Mufti Faraz Adam

Summary:

1. Zakat is payable on Amwal al-Tijara.Amwal al-Tijara are inventories purchased for resale in the ordinary course of business.
2. Any asset purchased for resale as business will always be Zakatable at the retail value regardless of when the item is sold.
3. If an asset is purchased not for business but for investment purposes either as a store of value or income generation, Zakat will only be on the underlying Zakatable assets if any, and not on the full value of the investment.
4. If the equity in a business is purchased with the intention to sell in the long-term when market conditions are right or when there is an opportunity to realise the investment, Zakat will only be on the underlying Zakatable assets if any, and not on the full value of the investment.
5. If a share is acquired of a Special Purpose Vehicle (SPV) whose only underlying business activity is to buy and sell the asset it owns, whether development land, property or something else, the entire share will be Zakatable at the full value.

Note, in number (4) above, the investor is a shareholder in a business even if he may be a sleeping partner or an investor in a start-up. In number (5), there is no underlying business, rather the shares are bought in a vehicle to buy and sell assets.

This short write-up will address the following:

1. What are Amwal al-Tijara?
2. The different intentions for transactions
3. A breakdown on different intentions and their Zakat treatment
4. Zakat treatment for different trading and investment strategies
5. Clear intentions

1. What are Amwal al-Tijara?

The Fuqaha describe Amwal al-Tijara (also regularly called ‘Urudh al-Tijara) as assets purchased in an Aqd al-Tijara (contract of exchange) with an intention of Tijara[i]. Tijara is business. In simple terms, the products in which a company does business in are Amwal al-Tijara.

Accounting is the language of finance and provides the necessary frameworks in understanding and recognising various contemporary assets. Although accounting frameworks are not identical to the Shariah principles of Zakat, there are several overlaps that can assist us to understand the nature of Zakatable assets further. For instance, the International Accounting Standard (IAS) 2 defines inventories as:

Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). [IAS 2.6]

Further, IAS 40 on investment property clearly states that property held for resale will also be part of inventory:

Property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories)

From the definition and discussion of the Fuqaha on Amwal al-Tijara , there are a number of parallels between what IAS 2 and IAS 40 considers as inventory and what the Fuqaha describe as Amwal al-Tijara. Of course, there will be differences, but in essence, Amwal al-Tijara are inventories. Just an inventory is that which has been purchased for resale in the ordinary course of business, Amwal al-Tijara are purchased with the intent to for resale in the ordinary course of business. As such, Amwal al-Tijara are inventories of a business. In principle, when a person does ‘business’ in any asset and purchases to resell seeking profit, that will always be Zakatable at its retail value. The operating cycles of businesses are generally short-term in nature; they buy inventory and stock to resell as soon as possible[ii].

Groceries in a grocery store are Amwal al-Tijara. Similarly, restaurants will treat all their stock and inventory that are cooked or used in their dishes as Amwal al-Tijara. If a person has a business or a side business where they buy and sell equities and shares as their ‘business’, this will be a form of inventory and will be Awmal al-Tijara. The key issue to note here is that this applies to buying and selling of financial instruments or equities which are performed in a business-like manner, where the financial instruments are bought to resell as the only firm intention.

In the above scenarios, there is certainty in the intention to resell, but there can be uncertainty in the time of resale as it depends on market forces and external factors. The certainty to resell at present as the primary intention underpinning the initial acquisition is what is key to establish something as Amwal al-Tijara[iii], whilst uncertainty in the eventual sale price will not disqualify the shares and financial instruments from being Amwal al-Tijara. This is like a person who sells inventory on eBay through a bidding mechanism; even though the final sale price is unknown, the clear intention to resell at present qualifies the inventory as business and Amwal al-Tijara.

Allamah al-Ayni Rahimahullah discusses Tijara and explains it as a well-known practice[iv]; Business is a specific course of action that has known operations, cycles, accounting treatment and activities[v]. Business or trading (Tijara) is a different activity and operation to investing (Istithmar); Investments are not Amwal al-Tijara. Investing refers to an activity where transactions are made as a store of value, wealth preservation, dividend/rental income and not to flip or sell immediately, even if certain activities are called ‘investments’ colloquially. Whereas business and trading refer to an activity whereby the core operation and primary model of a company or entity is to add value to an asset and on-sell that asset in the ordinary course of business, generally in the short-term or as soon as possible[vi]. An asset purchased not to resell in the ordinary course of business is not Amwal al-Tijara. When assets are not bought to do business, then such assets will not be Amwal al-Tijara.

2. The Different Intentions for Transactions

Considering the above, assets can be purchased for one of three reasons:

1. Personal use – This refers to assets purchased for personal use. Such assets will be deemed personal belongings and are not Zakatable (except cash, gold, silver etc.)
2. Investments

a. Store of value – This refers to an asset that is purchased to preserve and maintain one’s wealth in a form other than money. This asset may appreciate in value but is not from Mal Nami and maybe purchased to hedge against inflation risk that is prevalent in fiat currency[vii]. An asset purchased solely as a store of value will not be a type of Amwal al-Tijara. Rather, this is a type of investment (Istithmar) where the objective is long-term wealth preservation without any immediate intention to do business or sell the underlying. For example, a person purchases property, or purchases land or a collectible, not for business purposes, but to simply store and preserve the value of his wealth. Alternatively, a person may use this as a capital asset and an income-generating asset. Even in such as scenario, the asset will not be Zakatable as it is not inventory.

b. Income generation – This refers to the purchase of an income-generating asset that is purchased for dividends or rental income. The intention underpinning such an acquisition is to not sell the asset, but to earn ongoing income from such an asset. For example, the purchase of a buy-to-let property. 

3. Business – This refers to an asset purchased as inventory with the intention for resale and to make profit in the ordinary course of business regardless of what the asset is. This is from the Amwal al-Tijara[viii].

Certain types of business assets may take longer in their business and operating cycle to resell. For example, a property trader whose business is to purchase property and then flip the property on with a view to make a short-term gain through a refurb, may take longer to realise the inventory (Amwal al-Tijara) than a grocery store. For such a property trader, these properties will still be Amwal al-Tijara from a Zakat perspective even if it takes two years to eventually on-sell. The property trader will be required to pay Zakat annually on the fair market value of the property on their Zakat year-end.

3. A Breakdown on Different Intentions and their Zakat Treatment

4. Trading and Investing Strategies

Following on from the above, trading and investing can be performed with the following strategies:

1. Buy-and-hold: This is where a person does not do ‘business’ in the underlying assets. Instead they are seeking long-term growth and value. They are holding their assets and acquisitions as part of a portfolio with no intention to sell at present.

Zakat is not due on the full value of the investment in such a strategy. Zakat is only due on the underlying Zakatable assets if any. 

2. Savings, investments & store of wealth: This is where a person acquires assets or securities with no intention to sell at present even though he knows he will certainly sell one day in the future for capital gain. 

Zakat is not due on the full market value of such an investment. Zakat is only due on the underlying Zakatable assets if any. 

3. Active trading: This is where the trader is ‘trading’ and doing business in assets and securities. This is their business or side business and they seek an income or additional income through this buy-and-sell activity. This also includes a one-off purchase with the intention to resell in the near future to capture short-term positive price fluctuations.

In an active trading strategy, there is no uncertainty in the intention to on-sell immediately. That is the firm intention. There is only uncertainty in the price and the trader is seeking to sell at the best price possible.

In an active trading strategy, Zakat is due on the full value of the investment at market value.

There is a clear difference between a ‘trader’/’businessman’ and ‘investor’ as can be understood from the above strategies.

Summary on Investments

Any asset in which a person does not intend to do business (Tijara) with, in other words, the person does not intend to buy and sell the asset as inventory, but buys the asset, or a share in a pool of assets to preserve wealth and potentially sell one day in the future, then Zakat will not be due on the full value. Zakat will only be due on the underlying Zakatable assets if any. This will not beAmwal al-Tijaraor inventory in other words, and nor is it ‘business’. It will be an investment, and investments are Zakatable according to the underlying net Zakatable assets if any.

However, an investment wherein the operations are effectively buy-and-sell transactions, will be considered business and are Zakatable at the current value. For example, InMudaraba, whatever is purchased with the capital to resell will be Zakatable at the current market value of the investment[ix]. Similarly, an investment into a company whose business activity is to develop and sell land or property, will be Zakatable annually at the full investment value as this is in reality is the business; the only intention is to sell. Another example of this is a share acquired in a Special Purpose Vehicle (SPV) whoseonly underlying business activityis to buy-and-sell for profit, whether development land, property or something else, the entire share value will be Zakatable at the current market value.

5. Clear Intentions

To solve any confusion around whether an asset is a type ofAmwal al-Tijara, a person should just make an intention explicit and clear (of course, this will not work where the underlying operations are of business nature andTijara, as the actions are more explicit than the intention[x]). For example:

1. When investing in shares for diversification and growth, a person should simply make an express intention that they are not selling now and may sell in the future if the conditions are right. As long as his strategy is not business-like, this will qualify as a long-term investment. Zakat will only be due on the underlying net Zakatable assets.
2. When investing in private equity and start-ups, a person should simply make an express intention that they are not selling now[xi], and may sell in the future if a buyer comes and if the price is right[xii].

It may be inferred from the following texts that the type of activity occuring after the acquisition and the present intention in any transaction is what is definitive, and not what the future intention or goal is:

وفي فتاوى الشيخ الفقيه أبي الليث: إذا اشترى جوالق بعشرة آلاف درهم ليؤاجرها من الناس فحال عليها الحول فلا زكاة فيها لأنه اشتراها للغلة لا للتجارة، فإن كان في نيته أنه يبيعها آخرا فلا عبرة لهذا، وكذلك الجواب في إبل الحمالين وحمر المكارين.  (الفتاوى التاتارخانية)

Also quoted in al-Muhit al-Burhani as follows:

وفي «فتاوى أبي الليث»: إذا اشترى جوالق بعشرة آلاف دراهم ليؤاجرها من الناس، فحال عليها الحول، فلا زكاة فيها؛ لأنه اشتراها لغلة لا للتجارة،فإن كان في رأيهأنه يبيعها آخرًا، فلا عبرة لهذا،وكذلك الجواب في إبل الحمالين، وهم المكارين.(المحيط البرهاني ج 2 ص 249)

وكذا لو اشترى جوالق بعشرة آلاف درهم ليؤاجرها من الناس فحال عليها الحول لا زكاة فيها لأنه اشتراها للغلةوعزمه أنه لو وجد ربحاً يبيعهاً لا يعتبر(فتاوى قاضيخان)

(قَالَ:) وَمَا كَانَ عِنْدَهُ مِنْ الْمَالِ لِلتِّجَارَةِ فَنَوَاهُ لِلْمِهْنَةِخَرَجَ مِنْ أَنْ يَكُونَ لِلتِّجَارَةِ؛ لِأَنَّهُ نَوَى تَرْكَ التِّجَارَةِ وَهُوَ تَارِكٌ لَهَا لِلْحَالِ فَاقْتَرَنَتْ النِّيَّةُ بِالْعَمَلِ، وَإِنْ كَانَ عِنْدَهُ عَبِيدٌ لِلْخِدْمَةِ فَنَوَى التِّجَارَةَ لَمْ تَكُنْ لِلتِّجَارَةِ مَا لَمْ يَبِعْهُمْ؛ لِأَنَّ النِّيَّةَ تَجَرَّدَتْ عَنْ عَمَلِ التِّجَارَةِ وَهُوَ نَظِيرُ الْمُسَافِرِ يَنْوِي الْإِقَامَةَ فَإِنَّهُ يَصِيرُ مُقِيمًا وَالْمُقِيمُ يَنْوِي السَّفَرَ فَلَا يَصِيرُ مُسَافِرًا مَا لَمْ يَخْرُجْ إلَى السَّفَرِ، وَاَللَّهُ أَعْلَمُ بِالصَّوَابِ. (المبسوط للسرخسي ج 2 ص 198 المعرفة)

Further, when a person makes an intention to sell something in the future, that necessarily and logically entails that they are not selling at present. As such, the inferred meaning would mean that they are not selling at present and therefore, the item cannot be for business andTijara. Further, whenever there is an ‘if, maybe or don’t know’ in one’s intention regarding the resale of an asset, that asset will no longer beAmwal al-Tijara[xiii].

Allah alone knows best

Mufti Faraz Adam
Amanah Advisors

Reviewed by
Khondamir Nusratkhujaev
AAOIFI, Board member

Checked and Approved by
Mufti Mohammed Zubair Butt

23^rdApril 2021