Method of valuing merchandise of trade
Zakah is also paid on merchandise of trade. For instance, if someone has stock-in-trade at his shop then he will have to pay zakah on all his stock. However, at the time of valuation the shop-keeper is at liberty to value his stock at the price his good would fetch if sold in bulk. There is a retail price, a wholesale price and a price that would apply to the entire stock sold together. So, there is a scope to price the stock at such a price and then pay zakah at 2 1/2%; however, it is safer to use the wholesale price.

What is stock-in-trade
Everything that a man buys with intent to re-sell is stock-in-trade. Thus, if anyone buys a piece of land to re-sell at a higher price, or a house or car, then these things are his trading merchandise. Zakah is wajib (obligatory) on all these things because he had acquired them with intent to sell. Many people buy a piece of land as an investment intending to sell it later at a higher price and making a profit in the process. Zakah is payable on the value of this land. However, if anyone buys a piece of land with the hope that if he has an opportunity he will construct a house thereon for his personal use, or give it on rent or alternatively, sell it off so having' no definite intentions;. he has not made a choice of the three options then zakah is not payable on that piece of land. Zakah is only wajib when the intention at the time of buying was clearly to re-sell. Even if anyone buys a piece of land with intent to construct a house for himself but later on he changes his mind and decides to sell it, a mere change of intention does not involve any liability on him to pay Zakah; only after he actually sells the land and receives the sale proceeds will he have to pay zakah on that.

So, everything that is bought with intent to re-sell is stock-in-trade and attracts zakah at two-and-a-half percent

The date of valuation
It must be remembered too that the date of valuation is the date of calculation of zakah. If a piece of land was purchased for a hundred thousand rupees and values a million rupees on that date then will zakah be paid, on the latter value and not on one hundred thousand rupees.

Zakah on share certificates
Share Certificates are also stock-in-trade. There are two possibilities: a man may buy shares to receive annual profit from the company and another may buy them to sell them at a higher price.
In the second case where a man buys shares with intent to do business and sell them at a higher price then zakah is wajib on the full market value of the shares. For instance, if the purchase price was Rs.50 and the current market value is Rs.60 on the day of calculating zakah then the shares will be valued at Rs.60 and zakah is to be paid at 2 1/2%.

However, in the first case where the man did no intend to re-sell his shares at the time of purchase but hoped to receive annual profit on them he is allowed to find out the fixed assets of the company and its liquid assets and he may pay zakah on the proportion of liquid assets in his shares. The fixed assets include building-machinery, cars, etc. while the liquid assets comprise of cash, stock-in-trade, raw material and finished goods-Suppose, the fixed assets form forty percent of its overall assets and the liquid assets form sixty percent, the share-holder will value his share holdings at the market value and pay zakah on sixty percent of that value. Thus, if the market value of each share is Rs.60 and the assets on which zakah is payable comprise 60% of the assets while the remaining do not attract zakah then the value of each share liable to zakah is Rs.36. If this data cannot be found out from any company then zakah will be paid on the full market value.
Every other financial instrument apart from shares will be categorised with cash whether they are bonds or certificates. Zakah will be paid on their face value.
Factory Assets that attract Zakah

The finished product in a factory is liable to be valued for zakah. In the same way, zakah is payable on the merchandise at different stages of production and on raw materials. However, zakah is not payable on factory machinery, building, cars etc.

In the same way, if anyone is a partner in a business then he will be liable to pay Zakah on the market value of his share in business.

In short, zakah is payable on cash which includes cash at bank and financial instruments, on stock-in-trade that includes finished products, raw material and merchandise under different stages of production, on share certificates which are also included in stock-in-trade, and on everything else that is classified as stock-in-trade which anyone has bought with intent to re-sell.

At the time of paying zakah the gross value of all these things must be found out and zakah paid on that value.

Zakah on Loans Receivable
Apart from these, certain sums of money are receivable from other people. Either loans are given to them or sales are made to them on credit. So, when one calculates the gross value on which he has to pay Zakah, he must include sums receivable from all such sundry debtors. Although Shari'ah tells us that until sums receivable are not actually received Zakah is not payable on them yet when they are received Zakah is paid for every past year it was payable on them but not paid. For example, if anyone had loaned another person a sum of a hundred thousand rupees and he receives it back after five years then although it was not Wajib for him to pay Zakah on this sum of money for the five years yet once he had received it back then he will have to pay Zakah for each of those five years. Now, since it becomes very difficult sometimes to pay previous dues of Zakah all together so it is better to pay it each year regularly on the loan receivable. So, when a man calculates the Zakah payable to him, he may include sums receivable in the gross value.

Debts be deducted
The debts payable must be added up and their total deducted from the gross value of possessions on which Zakah is payable. On the net value, Zakah is paid at 2 1/ 2%. It is better to keep apart the Zakah payable and disburse it among those entitled to receive it from time to time.

Loans are of two kinds
We must understand that loans are of two kinds. The first kind is that loan which one ordinarily borrows for personal meds or to meet contingencies. The second type of loans are those which the capitalists take to finance their commercial projects for expansion. For instance, they borrow to set up a factory, buy machinery, import trading merchandise or to set up additional factories, etc. Now, if this second kind of borrowing is deducted from the gross value of possessions to arrive at the net wealth that attracts zakah, then not only will these capitalists find themselves not liable to pay zakah but also in fact, some of them might find that they are entitled to receive zakah. This is because they borrow from the financial institutions more than what they possess of zakah leviable wealth. They are poor people from this point of view. Therefore, Shari ah has distinguished the different borrowings when the question of deduction arises.

When are commercial borrowings deducted
The first kind of loans will be deducted from the gross value and zakah will be paid on the net value. As for the second kind of borrowings, if anyone borrows money for commercial purpose to finance anything on which zakah is levied (for instance, raw material) then the borrowings will be deducted from the gross value. But. if the borrowings are to finance such things as do not attract zakah then the loans will not be deducted from the gross value.

Examples of borrowings
Suppose someone borrows from a bank ten million rupees to buy machinery. Since zakah is not levied on plant and machinery, the loan will not be deducted from the gross value of his assets on which zakah is payable. But, if he purchased raw material from the borrowed money then the value of borrowings will be deducted from the gross zakah leviable value because the raw material itself attracts zakah, and is already included in the gross value.

In short, normal borrowings are deducted from the gross value but commercial borrowings are not deducted if used to finance something on which Zakah is not paid, but deducted if used to finance anything on which Zakah is paid. These were rules concerning payment of Zakah.

Zakah is paid to the entitled
Let us now see the rules concerning disbursement of zakah. My respected father, Mawlana Mufti Muhammad Shafi (rah) used to say that Allah has not asked us to just give out zakah but He has commanded us to pay it carefully and distribute it to the proper entitled people, not give it out injudiciously. The directions of Shari ah should be heeded while distributing zakah. Some people pay zakah but do not care to distribute it to the right people and do not care if it is put to proper use. They hand over the zakah money to someone without ensuring that he uses it for proper causes. There are many institutions that collect zakah and there may be many among them who do not make sure that money under this head is put to proper use. Therefore, zakah must not just be handed over but must be paid out with care.

Who is entitled?
Shari ah has prescribed the principle that zakah must be paid to only those who are not themselves Sahib Nisab. Even those people, who have in their possession anything more than their needs and which is worth as much as the value of fifty two and half tolas of silver, are not entitled to receive zakah. Such people are entitled to it who do not have anything equal to the value of fifty two and a half tola of silver after meeting their needs, whether cash or anything of that value.

The entitled must be handed over ownership
The Shari ah commands us that the person entitled to zakah must be made owner of it when the amount is paid over to him. This means that he should have a free say in his property. This is why zakah cannot be used to construct a building and cannot be paid as salary of the employees of an institution. If it was allowed to use zakah to build and establish institutions then it would have been misused, the buildings require much money and the institutions pay heavy salaries. Therefore, one who is not a Sahib Nisab must be paid zakah and transferred ownership over it. Zakah must be paid to only such people and only then is zakah validly paid.

The relatives who may be paid Zakah
The duty to pay zakah encourages the Muslim to spend the money under this head in a proper cause. He looks out for the right people and makes out a list of those entitled to receive it. He then disburses the amount to these people and it is one of his responsibilities to do so. One must pay zakah to those who are entitled and who live in his neighbourhood, who are his acquaintances, relatives and friends. The most excellent act in the payment of zakah is to pay it to those of one's relatives who are entitled and this secures him a dual reward - against payment of Zakah and against strengthening ties of relationship. Zakah may be paid to every relative who is entitled to it except two the relationship of father and son so neither father nor son can Pay it to the other, and the marital relationship so the spouses cannot pay of zakah to one another. All other relationship do not bar payment of Zakah, for example, one can pay it to a brother and a sister, an uncle or an aunt whether paternal or maternal, the only condition is that they should be entitled to it.

The command to pay Zakah to a widow and to orphans
Some people suppose that a widow must be paid zakah preferably but the condition stands here too that she must be one who is entitled to it and not a Sahib Nisab. If she is thus entitled then it is excellent to pay zakah to her. But, if she is a widow but not entitled then being a widow does not qualify her to receive zakah. In the same way, it is excellent to pay zakah to an orphan provided he is entitled to it but if he is not entitled being a Sahib Nisab then it does not qualify him to receive the zakah, although he is an orphan. These rules must be borne in mind while paying zakah to anyone.

Deduction of Zakah from Bank Accounts
For some time now, zakah is collected by the government and the financial institutions do it for the government as also some companies who deduct zakah and pay it to the government. This calls for some comments.

As far as banks and financial institutions are concerned, zakah of a person stands paid when deducted by them and he is not required to pay that again. However, he may form an intention on the 1st of Ramadan as a precautionary measure that he is paying the zakah so that his duty in this regard is discharged and he may not pay it again. Some people are in doubt that before the full year passed on their entire wealth, zakah is being deducted on all of it. I have stated earlier in this discourse that it is not necessary that a full year should pass on every part of the wealth. If anyone is a Sahib Nisab then even the wealth he gets a day before the year ends will be added to the gross value and the zakah deducted on it is correctly charged because zakah is wajib on that wealth.

Deduction of loan from the Bank Balance
However, someone may have all his wealth in cash in a bank account and not have anything else with himself. Then, he may also be a debtor and have to pay to other people, the bank will deduct zakah on the due date and he will not be able to deduct the "payables" from his gross wealth. There is one solution for that. He may withdraw the money from his account or transfer it to a current account before zakah is deducted because zakah is not deducted from a current account. Let me mention here in passing that everyone must maintain a current account and not a savings account because interest is paid on the savings accounts and that is unlawful. When he withdraws his money from the savings account, or transfers it, he will be able to take into account the "Payables" while calculating zakah. Alternatively, he may write to the Bank that he is not a Sahib Nisab and not liable to pay zakah. According to law, the Bank will not deduct zakah from his account when he writes to them in this way.

Deduction of Zakah on Shares by the Company
There is also the question of shares. When the company pays the annual dividend, it also deducts zakah but it calculates zakah on its face value while it should have been on the market value. So, while the zakah has been duly paid to the extent of the face value, the shareholder must calculate the difference between the market value and face value on the basis of the explanation under the head "Zakah On Share Certificates". For instance, the face value of a share is fifty rupees on which the company deducts zakah but the market value is sixty rupees, so the share-holder must pay zakah on ten rupees by himself. This applies to share certificates and N.I.T. Units. Thus, whenever zakah has been deducted on face value, the difference between the market value and face value must be calculated and zakah paid thereon.

The date of Zakah
Shari ah has not fixed a date for calculating zakah nor any period or date for its payment. In fact, every person may have his own date. In the eyes of Shari ah the true date begins when anyone becomes a Sahib Nisab. If anyone becomes a Sahib Nisab on the 1st Muhurrum then his date for zakah is that date and in future, he will calculate his zakah on the 1st of Muhurrum. But, often people do not remember when they became Sahib Nisab so they may fix any date when it is easy for them to calculate their liability. They may follow that date every year in future and it is good to pay a little more as a precautionary measure.

Can one fix a date in Ramadan
Normally, people pay zakah in the month of Ramadan because a Hadith tells us that observance of a fard (absolute obligation) in Ramadan entitles to a reward equal to seventy times. Thus payment of zakah will also fetch them a reward seventy times the normal reward. This is a correct thinking and commendable too but if anyone remembers his date when he became a Sahib Nisab then it is wrong for him to seek a date in Ramadan. He must calculate his zakah on the date he remembers; however, if he pays the calculated zakah in small amounts then he may pay the remaining in the month of Ramadan. If he does not remember his date then there is an excuse for him to fix a date in Ramadan. But he must pay a little more so that he may make up for any shortage because of difference in date.

Then He may go by that date every year and calculate his wealth accordingly. He may add up his wealth on that date, cash, gold holdings, shares, stock-in-trade, etc. and get their values on that date. He may not then change the date again.

This was a little comment on zakah. May Allah cause us to observe the commands that call on us to pay zakah. Aameen.

Taken from Discourses on Islamic Way of Life Vol Ix