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.
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:
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
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
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.
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
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
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 “.