I borrowed £15,000 to start a business selling fitness equipment, and had to start immediately paying back monthly instalments over five years. I was told by my supplier to pay 30% of the cost of production (30% of £15,000) as a deposit then the factory will make the goods and then I pay the rest upon delivery. It took one year until they completed the production and delivery from China to UK. I had to borrow money to cover shipping cost and VAT.
Do I have to pay Zakat on it for the year it was being produced, although it was not in my possession.
Also, how do I determine the market value of the goods to pay Zakat on for the following year after selling some of the stock, because it may be that no one wants to buy the products.
Moreover, this is a loss making business because I have to incur the delivery cost for the customers.
How much Zakat will I need to pay and how do I pay Zakat if I do not have money left over after selling the goods due to variable costs?
Zakat calculation is based on how much zakatable assets you own on your zakat date. In order to calculate your zakat liability, you would add all the cash, gold, silver and trade stock you own on your zakat date, deduct any already existing debts you owe at that moment and pay 2.5% of the remaining total.
For example, if on your zakat date you own £20,000, and have £10,000 worth of stock then your total zakatable assets are £30,000. If you have £12,000 in debts then you will deduct £12,000 from the £30,000 and pay 2.5% of the remaining £18,000.
When a person takes a loan, the borrowed money comes into their ownership and thus the borrower must technically pay zakat on that amount. However, as they also have a debt of the same amount they can deduct that amount from their assets.
However when it comes to long-term loans the application of this deduction would be slightly different. If an individual has taken out a long-term loan from an institution whereby they are only required to make monthly or yearly payments then in such a case the individual will not deduct the entire sum from their assets, as the entire sum is not being demanded at that moment. Rather, they will only deduct the payments due to be made over the coming year. For example, a person takes out a £50,000 loan from a bank. They are only required to repay £12,000 a year. Hence, at the zakat date, the individual may only deduct £12,000 from their assets and pay zakat on the remaining £38,000 as well as their other zakatable assets.
This rule applies to long-term loans taken out via a formal institution and does not apply to private loans taken from individuals. The reason for this is that in a private loan, even though a payment plan maybe agreed, technically the lender can demand the entire loaned amount to be paid back at once. Hence, with these types of private loans the full sum will be considered deductible. Also, if a person has taken out a long-term loan with an institution but despite the payment plan they are making every attempt to pay back the loan as soon as possible, then in such a case they may deduct the entire sum similar to a private loan.
Going back to the scenario in question, you borrowed £15,000. This money comes into your ownership and is therefore technically zakatable. From that £15,000 you paid £4500 as a deposit to the manufacturer. Hence, you will own £10,500. This sum will then be added to any other zakatable assets you own.
As for your debts, if the loan was a private loan or a formal loan with an institution but you were attempting to re-pay it as soon as possible, not going by the payment plan then you may deduct the full £15,000 from your zakatable assets. If however, it is a formal loan and you intend to follow the payment plan then you will only deduct the payments due over the coming year.
That is in regards to the sum that was borrowed. As for the stock which was in production, it will not be zakatable during production. You will only have to pay zakat on the stock once you take possession of the stock as that is when you technically become the owner of the product.
If on your zakat date you have some stock remaining you will value your stock and pay zakat accordingly. The valuation will be according to how much it would currently sell for. If you find that your stock has no value at all, then it will not be zakatable. However, this must be due to the stock actually having no value and not due to the lack of marketing the products properly.
As mentioned above zakat is calculated according to the assets one owns on their zakat date and not based on how much profit or loss the business makes at the end of a year, unlike taxes liabilities.
You may find the following videos useful to help you calculate your zakat.
Ifta Research Fellow
Checked & Approved by:
Mufti Abdul Rahman Mangera
Mufti Zubair Patel