3. The Benefit of
Determining One's Financial Year and How to go about it.
Throughout this discussion, we kept talking
about the phrase "the end/turn of the year", or "the lapse of
the year". It is important to dwell on this issue, especially
with regard to its implications on the process of Khums.
i. What is meant by this term is the lapse of
a full year from the date gains, from the mukallaf work
or business, are made. It is very important from a practical
angle, so that income and expenditure are accounted for, be they
those for one's provisions or means of production and commercial
activity. All this is vital for the actualization of ingredients
and requirements of Khums process, especially when it
comes to the surplus to one's requirements, which we be carried
out in its discussion on the tax year of matters commercial will
be carried out in its appropriate slot.
Despite the fact that, to start with,
Khums becomes due as soon as profit is made, it remains to
be computed on the amount left over one's and above one's
expenditure during the year.
For example, if someone knew for a fact that
he is not going to use up any amount of the profit once it is
made on his provisions, there shall be no need to wait until the
end of the year. Accordingly, he should, as a matter or
voluntary precaution, hasten to pay Khums on that gain.
Another example could be of a person who, at
the start of the year, made a lot of money; he can set aside an
amount for his annual provisions, even if it is an estimate. He
should therefore pay Khums on the remainder.
ii. The start of the year is a natural
occurrence which is beyond the mukallaf's intention or
control. It comes about the moment an earning is made; what he
should therefore do is to wait for the anniversary of that date.
However, the mukallaf may choose a particular date for
his financial year; yet having done that, he must pay Khums
on the gains he first made at the chosen date. The same
applies in case he decides on yet another date.
However, the mukallaf is free to adopt
ant calendar he likes, i.e. the lunar Hirji, the solar or any
108. Those with regular monthly income, such
as salaried employees, do not have to worry about waiting for
the next year to cater for every portion of gain. For example,
the employee may receive his wages for the twelfth month before
the end of the year. Such will count for the earnings of that
year, although not a full year would have elapsed on those
The same goes for gifts received before the
end of the year and remain untouched till then. He is required
to pay Khums on such gifts.
That said, should the mukallaf have
several sources of income, he is free to choose a date for a
financial year either for each one of these sources or one date
for all of them.
109. The mukallaf may be paid for his
work, other than trade, such as a tradesman, a contractor… etc.
for a number of years, of a contract, in advance. Such is not
required to pay Khums on the whole amount he receives
that year. He should distribute it equally on the number of
years, deduct his yearly expenses form it, and pay Khums
on the surplus, i.e. year by year.
110. The gains of the mukallaf may not
be available for him at the end of his financial year. All of
them or part thereof is owed to him by others. He has the choice
of either paying Khums on such gains now or waiting until
it is paid to him in the following year/s. once received, he
should hasten to pay Khums on it, counting it as part of
the gains of past years, not the year he got his hands on. That
is, if the debt is not of the type, which has a time span,
within which it should be paid. If so, i.e. it is paid on the
due date or before it, it is obligatory to pay Khums on
it when it is retrieved because it is treated as though it is
4. Khums Paid on Economic Activity
Property, be it monetary or capital assets,
could serve two purposes. That which is saved to be spent on
one's needs, which is technically known as "provisions" or that
which is saved to be invested with a view to making profit,
which is known as "trade" or "economic activity".
What we mean by the latter is that needs
capital, be it money or assets, to get started included in that
are (economic activities such as) trading (speculating in
currency or merchandize, investment in industrial, commercial
agricultural ventures, and other avenues of investment. This
section requires a lot of attention because it has so many
ramifications, not least how to determine a date for one's
financial year, profit and loss matters debt… etc.
Capital comprises all that which has a
bearing on the economic activity, as follows:
i. Capital assets used in the production
process; such things as machinery, vehicles, row materials, the
plant, showroom, store, buildings, and furniture. This title may
include things which are not capital assets, such as the premium
paid to acquire the property. In the same league of "premium" is
money deposited by the proprietor as surety of setting the
production facility up. However, what is paid for procuring the
permission for the project is not considered among capital; it
is part of the proprietor's provisions, similar to
workers/employees wages and the rent of the place.
Included in capital assets is a farmer's
tools and equipment, an owner drivers vehicle, cultivated land,
livestock for dairy farming, etc.
ii. Merchandise bought and sold; covered by
this title are bank/ financial services, real estate, etc.
However, we have to dwell on certain matters:
111. Capital, of any sort, has to be Khums
taxed, including the premium paid for the place, even though the
owner has nothing else apart from that premium money and the
office furniture, for example.
Things that are exempt form Khums
i. Any capital derived from property whose
Khums has been paid, or that which is originally not liable
for Khums, such as inheritance, a wife's dowry, and
compensation for an irrevocable divorce.
For example, a man inherited a property from
his father. Having sold it, he bought foodstuffs with the money
with the intention of making profit on them. Such is not
required to pay Khums on this capital which he started
his business with; he is liable though to pay Khums on
any profit he makes over and above the sale price of the
property. The same ruling applies, should the person in this
example decide to do some other business after selling the
The same goes for any goods that get damaged
or sustain a loss, which is made up from the profits the
businessman made during his financial year. That is, the capital
retains its qualification for exemption from Khums. In
case there was a great loss, which cannot be offset from the
profit of the year, or total loss for that matter, the capital
is considered lost, in which case it cannot be compensated for
from the profits of the following year, as will be elaborated.
ii. Any property, which is equivalent to the
amount of one's annual provisions, can be used for setting up in
business of any sort, provided that the person does not have any
other productive work and that the said property is the only one
they posses, is exempt from Khums. However, this is the
case if the property is not originally liable for Khums
in that it could have been sitting idle for over a year before
it was put to use.
Should such a person have another source of
income, such as a paid job, which covers all his annual expense,
he should no longer be eligible for this exemption. However, if
this second source of income falls short of covering all his
annual expenses, he stands to be exempt from the amount, which
constitutes the shortfall only.
The same treatment is accorded to a person
who receives a gift of say, the thousand (x) currency; should he
not have any other property and decide to trade in this grant,
he is not required to pay Khums on it.
If the same person has a job which earns him
some five thousand per annum, he is not required to pay Khums
on half of the grant. The same treatment should apply to the
person, who does not have a job, yet he has in his hands five
thousand worth or property, in excess of the granted amount.
112. Several years may elapse since the
businessman first set up in business without specifying a date
for his financial year. Having decided to do so, any amount of
annual provisions to be exempt from tax for previous years has
to be in line with what he is actually spending in the current
year, i.e. not the year he started his business. However,
resorting to ihtiyat in taking the interest of eligible
person is better.
113. One may delay paying Khums on
trading capital from the date the business started to the end of
the year. That is, unless the start up capital was originally
liable for Khums for any reason, such a it may have been
lying idle in his hands for over a year, without payment of
Khums tax. It maybe the case that it was of profits made by
the mukallaf on which Khums was not paid. It also
could be that the capital money was tainted with illicit
money, and so forth.
When Khums is calculated at the end of
the year, capital equipment and another similar means of
production have to reflect the amount of depreciation. That is,
if the due date of the tax year the machine is worth less than
its purchase price, the current value has to be adopted for the
What profits should carry Khums
114. No Khums shall be paid forthwith
on profit generated by capital on which Khums was paid.
The mukallaf may wait until the date of his financial
year, or until one year has elapsed sine the profit was first
made, if he does not have a specific date for his financial
year. The reason being that during the waiting period, i.e.
until the first anniversary, the mukallaf has the right
of disposal over what profits he has made during the year. He
may, if he so wishes, pay for the expenses for his provisions
and pay back debt, even if it was for previous years. He is
allowed to deduct any expenses he incurred in the production
process, such as rent, wages, fuel, and so on.
For example, the turnover of (x) business is
twenty thousand (x – currency). Allowing for, say, eight
thousand which he spent on his expenses (personal allowance) and
four thousand operating cost, what should be Khums taxed
is the remainder, i.e. eight thousand.
115. It is not obligatory on the mukallaf,
who has different sources of income,, to itemize profit, i.e. by
choosing a (tax) date for each and every type of profit he
makes. That is, regardless of the type of business and the
sub-divisions of any one type of business.
116. Allowing for capital expenditure is not
confined to the profit made during the year the expenditure was
made. That is, if profit was not forthcoming only in, say, any
number of years, it should be taken into account when made.
117. Just as capital expenditure is deducted
from the profits, so is any amount set aside to make up for any
loss that may come up by the end of the year. Included in this
any loss sustained by man, machine, materials, manufactured
goods, depreciation of equipment, etc. (fixed/floating capital).
The ruling in this regard is one, i.e. whether the loss was
sustained is one go, in the year in hand, or was gradual, i.e.
over the years.
118. The loss can be catered for from the
profits of the year, whether it was sustained before any profits
are made or after profits were made.
For example, a merchant invested fifty
thousand (x- currency) in buying certain merchandise. He either
sold some of it and made profit, or did not make any profit. The
market price of the merchandise fell to forty thousand of the
purchase price. He may as well have used some of this
merchandise for his personal needs by an amount, say, equivalent
to ten thousand. Or ten thousand worth of goods and made a
profit of, say, twenty thousand. In all these examples, the
merchant is allowed to indemnify the loss of ten thousand, which
his initial capital has suffered, i.e. by topping up the
shortfall in the capital. So, this leaves the merchant with
Khums liability on the remaining ten thousand.
However, should the loss be carried forward
to the following year, the new capital would be forty thousand.
If any profit is made in the new year, it cannot be used to
indemnify the loss.
This also applies in the case of total loss of capital; it
could be indemnified from the profits made in the year and not
from the profits of future years.