Published: 25 December 2024, 04:26 am | Updated: 26 December 2024, 11:36 am
|||Zakat and taxes are integral components of the Islamic fiscal system. While both are obligatory, they differ significantly in terms of rates, eligibility criteria, requirements, and areas of expenditure.
For those planning to live or do business in Saudi Arabia, understanding the distinction between Zakat and taxes is essential. This knowledge helps ensure compliance with legal obligations and avoids potential penalties. In this blog, we will explore the key differences between Zakat and taxes, determine which applies to you, and clarify the applicable rates.
Zakat (Net Worth Tax) in KSA Simply Explained
Let us first define and introduce Zakat. As the third pillar of Islam, Zakat requires Muslims to make a yearly donation as a mandatory act within their faith. These donations are made to the less privileged and the needy. Zakat can be paid at any time during the year; however, it is traditional to pay Zakat either during the Hajj pilgrimage; the month of Ramadan, especially on Laylat Al Qadr; or during Eid.
Who Is Subject to Zakat?
Any Saudi person or any person from the countries of the Gulf Cooperation Council residing in Saudi Arabia and engaged in a business activity aiming to generate profit is under the Zakat obligation. These activities can include investments; services; and commercial, industrial, or financial activities, to name a few.
Investors who are Saudi citizens or GCC citizens residing in Saudi Arabia are also liable for paying Zakat. If a company is owned by Saudis and non-Saudis, the portion of taxable income related to non-Saudis is subjected to income tax, while the Saudi portion is liable for Zakat.
How Is Zakat Calculated?
Zakat is levied at a rate of 2.5% on specific assets owned by Muslims who are eligible to pay Zakat. These assets encompass specific types of wealth which include savings, investments, gold, and agricultural produce.
To pay Zakat, these assets have to exceed “Nisab”, which is a minimum threshold equivalent to 87.48 grams of gold and 612.36 grams of silver as set by the Prophet Muhammad (pbuh). A rate of 2.5% of the value of these assets is paid annually.
The payment of Zakat mainly aims at redistributing wealth and providing assistance to the less fortunate in one’s community within the tenets of Islam.
What Are Net Assessable Funds in Zakat?
In general, net assessable funds in Zakat include the amounts invested in fixed assets, long-term investments, deferred expenses, and the adjusted income for the year.
Income Tax in KSA Simply Explained
Saudi Arabia does not impose income tax on individuals, whether they are nationals or expatriates. However, companies are subject to taxation based on ownership.
Businesses owned by non-Saudi, non-GCC nationals are taxed under corporate income tax, while those owned by Saudis or GCC nationals pay Zakat, an Islamic financial obligation.
Who Is Subject To Income Tax In KSA?
The income tax law in Saudi Arabia applies to the following:
- Non-Saudi or non-GCC individuals holding shares directly or indirectly in companies involved in oil and hydrocarbon production.
- Shareholders of companies listed on the Saudi stock market if the shares are traded in the Saudi capital market.
- Individuals or companies engaged in oil and hydrocarbon production, either directly or indirectly, including those listed on the Saudi stock market.
- Resident non-Saudi individuals conducting business activities in Saudi Arabia.
- Non-residents conducting business in Saudi Arabia through a Permanent Establishment (PE).
- Non-residents earning taxable income from Saudi sources without a Permanent Establishment.
- Investors in natural gas fields.
- Individuals or entities working in oil and hydrocarbon production.
What Is the Income Tax Rate in KSA?
In Saudi Arabia, corporations are subject to an income tax rate of 20% on net adjusted earnings.
Exceptional Income Tax Rates
While the income tax rate is set at 20% of net adjusted earnings in the KSA, a rate ranging between 50% and 85% is levied on income resulting from the extraction of oil and other hydrocarbons.
Understanding the Concept Behind Payment of Zakat and Tax
The concept of paying Zakat and tax lies in their distinct purposes:
- Zakat is a religious obligation aimed at redistributing wealth to support the less fortunate. Wealthy Muslims are required to donate 2.5% of their assets annually to those in need, fostering social equality and compassion.
- Tax is a civic duty imposed by the state to fund public services, administration, and development projects. Taxes are collected at defined rates to cover government expenses, such as paying public servants, maintaining infrastructure, and providing essential services to citizens.
Both systems ensure fairness and contribute to the betterment of society, albeit through different mechanisms.
Religious Obligation Vs. State Obligation: A Comparative Analysis
The key distinction between Zakat and tax lies in their origins and purposes:
- Zakat is a religious obligation mandated by Islam, designed to encourage wealth redistribution and promote social welfare. Its ethical foundation ensures that the wealthy contribute 2.5% of their assets annually to support the less fortunate, fostering a sense of community and compassion.
- Tax, on the other hand, is a state-imposed obligation intended to fund governmental functions, including administration, public services, and infrastructure. Tax payment is viewed as a civic responsibility, essential for maintaining the state’s operations and serving its residents.
In Saudi Arabia, the Zakat, Tax, and Customs Authority (ZATCA) oversees the collection of both Zakat and taxes. While both are managed by the same authority, their calculation and allocation differ, fulfilling both Islamic principles and state governance requirements.
Avenues of Spending Zakat Vs. Tax
Zakat and tax differ not only in their collection methods but also in how the funds are utilized.
- Zakat, rooted in Islamic law, is dedicated to supporting the less fortunate within the Muslim community. In Saudi Arabia, the government ensures that Zakat funds are distributed according to the eight categories of beneficiaries outlined in the Quran, such as the poor, the needy, and others entitled to financial aid.
- Tax, by contrast, is a tool for financing government functions. It funds public services, infrastructure, administration, and other state expenditures. Unlike Zakat, the allocation of tax revenue is focused on national development and governance rather than direct aid to specific groups.
Main differences between Tax & Zakat
The below table illustrates the difference between Zakat and tax to help you understand them better.
Zakat | Tax |
A pillar of Islam | Imposed by the state |
Paid only by Muslims whose wealth exceeds the Nisab | Paid by those eligible without any religious requirement |
2.5% of assets | The percentage differs between individuals, corporations, countries, activity and more. |
Given to the poor as a means of redistributing wealth | Paid to the state as a financing mechanism for its administration and services. |
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Final Thoughts
In short, Zakat reflects the law of God while tax is a result of the law of man. In Saudi Arabia, both are collected, each with specific stipulations regarding rate, eligibility, and avenues of spending. For anyone considering company formation in Saudi Arabia, understanding these concepts is vital. Business owners must navigate the country’s tax and Zakat requirements to ensure compliance with both state laws and religious obligations. Proper adherence is a fundamental aspect of establishing and running a business successfully in the Kingdom
Frequently Asked Questions
1. What are the conditions for giving Zakat?
Below are the eligibility criteria to pay Zakat:
- Adult, sane Muslim
- Debt-free
- In ownership of the Nisab (minimum amount of wealth)
2. What is the difference between Zakat and corporate tax?
Zakat is a pillar of Islam, imposed on eligible Muslims; while tax is a civic obligation on the residents and citizens of a country.
3. What is Saudi Premium Residency?
Saudi Premium Residency allows expatriates to live, work, and own property in Saudi Arabia without a sponsor. It offers both permanent and temporary residency options with various benefits, including the ability to travel freely and invest in the Kingdom.
4. What is tax and Zakat in Saudi Arabia?
Zakat is a religious tax imposed on all eligible Muslims while taxes are imposed by the state on eligible individuals or corporations. In the KSA, the Zakat, Tax and Customs Authority (ZATCA) collects both Zakat and Tax.
5. What is the difference between Zakat and Usher?
The Zakat is levied on movable property that remains in your possession for a full lunar year. Ushr, meaning tenth, is paid on crops produced by lands you own. To pay Zakat, you must be a sane, adult Muslim with a wealth exceeding Nisab. Ushr is paid by the owner of any crop-producing land even if they are a minor or not of a sane mind.
6. Is Zakat the same as tax?
Zakat differs from a tax in the sense that it is imposed by Islam on eligible Muslims. Zakat should be given to the poor as a means of giving back to society and redistributing wealth. Tax is collected by a government as a means of financing the state.
7. Is there any tax credit for Zakat and corporate tax?
The tax credit does not apply for Zakat; however, a taxpayer business can claim tax credit for taxes paid on their income during a tax year.