Fatawa >Khums >chapter one > part five

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119. We have already discussed the issue of Khums levied on any profit (return), be it sustained or intermittent, without difference between what has been acquired for keeping or for trading in. the reason being that this return is over and above the capital invested, hence its covering by the rules governing profits. We also mentioned the increase in value (appreciation) as a result of market forces. We have made distinctions between that which has been passed into the hands of the proprietor by buying, possessing, or through inheritance on the one hand, and that which has been indented for profit, personal keeping, or commercial purposes. For more details, especially, for business matters.

120. An notional profit on capital investment, such as property, should not attract Khums, unless the property is sold during the year and real profit made.

The same rule applies on the assumption that the expected profit could have been realized, if the property were sold before the turn of the year. Should the (market) value of the property drop to its purchase level, the proprietor is not required to pay Khums on the notional profit, had he sold the property before long. However, should the value drop only partially, i.e. some profit would be made if the property were sold, Khums should be paid on that notional partial profit.

121. Capital invested in business should not be treated differently from any other property with regard to payment of Khums either in kind or the equivalent thereof. We have discussed this is some detail in the chapter dedicated to "how to asses the amount of Khums". We have also mentioned that the fluctuation in goods prices during the year is immaterial. What is of consequence in this regard though, is the prices at which the goods are sold at the date of the tax year. However, retail and wholesale prices have to be taken into account.

For example, a merchant buys garments at one thousand (x – currency) each, and sells them for three thousand. Yet, the market sale price is two thousand. The criterion for assessing the price of the unsold garments should be the going price. That said, since it is difficult to determine the sale price, especially in free market economies, the mukallaf is left with no alternative but to reach an agreement with the Marji' (on what price should be adopted) or practice ihtiyat.

Agricultural Produce and Livestock

122. The ruling as one with regard to the capital invested in agricultural produce and livestock and other types of capital, be it that concerning one's annual provisions, already discussed, or trade which we are about to discuss:

i. Livestock

The mukallaf may acquire cattle, goats, sheep, or the like with a view to making business in their dairy products, wool… etc.

The capital thus invested, including that paid for equipment, machinery. sheds for the animals, vehicles… etc., should be Khums taxable. However, should the market value of the business go up, no extra Khums should be paid for increase in value, so long as the objective of setting up the business is the return on the investment not the capital assets themselves. That said, profit must be liable to Khums after the deduction of one's provisions and production expenses.

If however the mukallaf decides to trade in livestock itself, the capital invested as well as any profit made should be Khums taxed, including the increase in the market value of the livestock that remained unsold at the turn of the year.


What applies to livestock applies to agricultural land. Should one make a business out of tilling the land, the cultivated land, what is grown in it, and what is on it, i.e. of buildings, machinery, vehicles, …etc, is considered capital which should be treated in the same way as has already been discussed. However, should it appreciate during the year, the increase should not attract Khums.

For example, the proprietor could lease the land and its facilities for, say, five years. Having done so and received the money for the entire lease duration, how is he going to calculate the amount of Khums and pay it?

A. The rent he received, although for five years, counts as profit made in the current year. After deducting his total expenses for the whole year, and the depreciation, which is likely to befall the farm land/grove, due to non-profitability during the tenancy period, Khums tax must be paid on the remainder.

This should be the case, if the proprietor wanted to make do with the produce of the grove per se. should his intention be making profit from the grove itself, i.e. by, say, selling it, the entire investment is considered capital. If this was the intention, any appreciation in the grove price during the year, the amount of increase should attract Khums, even if the property is not sold. The same ruling applies in the case of anyone renting/leasing a property, vehicle… etc. for a number of years.

123. The farmer may cultivate his land with more than one crop, be it for his provisions or trade. Going about counting the profit of these crops is by considering that matures during the year; crops that may take longer to get ready for harvest, so much so that they miss the date of one's fiscal year, their profit, if any, must be computed when it is made, i.e. in the following year. That said, this does not cover any produce which has a value in itself, i.e. without is bearing fruit/crop, such as grass used a animal feed, in which case it must be taken on board with profits of the current year.

Business Debt

Perhaps no commercial transaction is bereft of debt/credit for the businessman. Since the rules governing business debt are different, in some aspects, from those designed to regulate debt incurred by providing for oneself, discussed hereunder are the dissimilarities:

i. Debt incurred by the mukallaf:

a. That which is in the hand of the businessman used in his commercial activity, be it in the form of stock or its cash equivalent, i.e. the initial capital to set up the business. This could be a loan or the cost of capital equipment or tools of the trade.

The rules concerning this type of debt are as follows:

Any capital, which is, wholly or partly, debt on the business is considered non-existent. For example, if the capital was fifty thousand (x – currency), half of it raised by the businessman from his own money and the other half borrowed, the capital which counts at the end of the day is only the portion which belongs to the businessman. Accordingly, his portion should attract Khums, whereas the borrowed portion should not as long as he remains in debt.

However, when it comes to treating profits, the amount of debt should not play any part in the computation. For example, if the said businessman made a profit of twenty thousand, 20% of it in Khums money has to be levied, regardless of whether he chose to add it up to his capital or pay his debt. That is, after allowing for one's yearly provision and those expenses incurred in the process of running the business.

In other words, the businessman who has to pay back , say ten thousand in his financial year, of his debts by way of monthly installments, he should at the turn of the year consider this sum as profit, in which case he must pay Khums tax on it, and son on and so forth in the following years/s.

It is noteworthy though that he who borrowed money to start a business, but did not bother to pay Khums on the profits years on end, either through ignorance or disobedience (of the dictates of the faith), he is not required to pay Khums on the existing (market) price, no matter how high is may be. His duty is to pay Khums on it at its original price with an incremental portion levied on the amount of Khums itself. The legal right in his property would therefore be one quarter of one eighth of the original price.

124. "Borrowed money" is treated the same, be it form a bank in any form or from other sources, with or without interest; whether or not the borrower had a valid reason to pay interest is also immaterial.

b. The debt could have been incurred as a result of repairing a damage or indemnifying a loss sustained by the capital, such as borrowing money to make up the shortfall in capital money/material, or any other reason pertaining to the means of production; however, what is peculiar to this type of borrowing is that it does not have an equivalent in the existing capital assets or money to pay for it, if need be.

The rules governing this type of borrowing are as follows:

Should the business pay back the debt from the profits it makes, the amount paid is exempt from Khums, such profit is deemed compensation to the loss sustained. Should the payment of debt be made from the profits of the following year, it is permissible, however, Khums has to be levied.

If no profits were made in the year the loan was taken, and the payment of debt was made in the second year, no Khums is due.

125. This ruling concerning the preceding issue is confined to the debt connected with the capital. The debt may arise as a result of non-payment of Khums in the previous year, which may be with or without good reason. Having decided to pay it from the profits of the second, or future years, the matter has been discussed in some detail in para. (99) on the rules of "provisions exempt from Khums “.