Fatawa >Khums >chapter one > part Four

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3. The Benefit of Determining One's Financial Year and How to go about it.

Throughout this discussion, we kept talking about the phrase "the end/turn of the year", or "the lapse of the year". It is important to dwell on this issue, especially with regard to its implications on the process of Khums.

i. What is meant by this term is the lapse of a full year from the date gains, from the mukallaf work or business, are made. It is very important from a practical angle, so that income and expenditure are accounted for, be they those for one's provisions or means of production and commercial activity. All this is vital for the actualization of ingredients and requirements of Khums process, especially when it comes to the surplus to one's requirements, which we be carried out in its discussion on the tax year of matters commercial will be carried out in its appropriate slot.

Despite the fact that, to start with, Khums becomes due as soon as profit is made, it remains to be computed on the amount left over one's and above one's expenditure during the year.

For example, if someone knew for a fact that he is not going to use up any amount of the profit once it is made on his provisions, there shall be no need to wait until the end of the year. Accordingly, he should, as a matter or voluntary precaution, hasten to pay Khums on that gain.

Another example could be of a person who, at the start of the year, made a lot of money; he can set aside an amount for his annual provisions, even if it is an estimate. He should therefore pay Khums on the remainder.

ii. The start of the year is a natural occurrence which is beyond the mukallaf's intention or control. It comes about the moment an earning is made; what he should therefore do is to wait for the anniversary of that date. However, the mukallaf may choose a particular date for his financial year; yet having done that, he must pay Khums on the gains he first made at the chosen date. The same applies in case he decides on yet another date.

However, the mukallaf is free to adopt ant calendar he likes, i.e. the lunar Hirji, the solar or any other calendar.

108. Those with regular monthly income, such as salaried employees, do not have to worry about waiting for the next year to cater for every portion of gain. For example, the employee may receive his wages for the twelfth month before the end of the year. Such will count for the earnings of that year, although not a full year would have elapsed on those wages.

The same goes for gifts received before the end of the year and remain untouched till then. He is required to pay Khums on such gifts.

That said, should the mukallaf have several sources of income, he is free to choose a date for a financial year either for each one of these sources or one date for all of them.

109. The mukallaf may be paid for his work, other than trade, such as a tradesman, a contractor… etc. for a number of years, of a contract, in advance. Such is not required to pay Khums on the whole amount he receives that year. He should distribute it equally on the number of years, deduct his yearly expenses form it, and pay Khums on the surplus, i.e. year by year.

110. The gains of the mukallaf may not be available for him at the end of his financial year. All of them or part thereof is owed to him by others. He has the choice of either paying Khums on such gains now or waiting until it is paid to him in the following year/s. once received, he should hasten to pay Khums on it, counting it as part of the gains of past years, not the year he got his hands on. That is, if the debt is not of the type, which has a time span, within which it should be paid. If so, i.e. it is paid on the due date or before it, it is obligatory to pay Khums on it when it is retrieved because it is treated as though it is available.

4. Khums Paid on Economic Activity

Property, be it monetary or capital assets, could serve two purposes. That which is saved to be spent on one's needs, which is technically known as "provisions" or that which is saved to be invested with a view to making profit, which is known as "trade" or "economic activity".

What we mean by the latter is that needs capital, be it money or assets, to get started included in that are (economic activities such as) trading (speculating in currency or merchandize, investment in industrial, commercial agricultural ventures, and other avenues of investment. This section requires a lot of attention because it has so many ramifications, not least how to determine a date for one's financial year, profit and loss matters debt… etc.

Capital

Capital comprises all that which has a bearing on the economic activity, as follows:

i. Capital assets used in the production process; such things as machinery, vehicles, row materials, the plant, showroom, store, buildings, and furniture. This title may include things which are not capital assets, such as the premium paid to acquire the property. In the same league of "premium" is money deposited by the proprietor as surety of setting the production facility up. However, what is paid for procuring the permission for the project is not considered among capital; it is part of the proprietor's provisions, similar to workers/employees wages and the rent of the place.

Included in capital assets is a farmer's tools and equipment, an owner drivers vehicle, cultivated land, livestock for dairy farming, etc.

ii. Merchandise bought and sold; covered by this title are bank/ financial services, real estate, etc.

However, we have to dwell on certain matters:

111. Capital, of any sort, has to be Khums taxed, including the premium paid for the place, even though the owner has nothing else apart from that premium money and the office furniture, for example.

Things that are exempt form Khums include:

i. Any capital derived from property whose Khums has been paid, or that which is originally not liable for Khums, such as inheritance, a wife's dowry, and compensation for an irrevocable divorce.

For example, a man inherited a property from his father. Having sold it, he bought foodstuffs with the money with the intention of making profit on them. Such is not required to pay Khums on this capital which he started his business with; he is liable though to pay Khums on any profit he makes over and above the sale price of the property. The same ruling applies, should the person in this example decide to do some other business after selling the foodstuffs.

The same goes for any goods that get damaged or sustain a loss, which is made up from the profits the businessman made during his financial year. That is, the capital retains its qualification for exemption from Khums. In case there was a great loss, which cannot be offset from the profit of the year, or total loss for that matter, the capital is considered lost, in which case it cannot be compensated for from the profits of the following year, as will be elaborated.

ii. Any property, which is equivalent to the amount of one's annual provisions, can be used for setting up in business of any sort, provided that the person does not have any other productive work and that the said property is the only one they posses, is exempt from Khums. However, this is the case if the property is not originally liable for Khums in that it could have been sitting idle for over a year before it was put to use.

Should such a person have another source of income, such as a paid job, which covers all his annual expense, he should no longer be eligible for this exemption. However, if this second source of income falls short of covering all his annual expenses, he stands to be exempt from the amount, which constitutes the shortfall only.

The same treatment is accorded to a person who receives a gift of say, the thousand (x) currency; should he not have any other property and decide to trade in this grant, he is not required to pay Khums on it.

If the same person has a job which earns him some five thousand per annum, he is not required to pay Khums on half of the grant. The same treatment should apply to the person, who does not have a job, yet he has in his hands five thousand worth or property, in excess of the granted amount.

112. Several years may elapse since the businessman first set up in business without specifying a date for his financial year. Having decided to do so, any amount of annual provisions to be exempt from tax for previous years has to be in line with what he is actually spending in the current year, i.e. not the year he started his business. However, resorting to ihtiyat in taking the interest of eligible person is better.

113. One may delay paying Khums on trading capital from the date the business started to the end of the year. That is, unless the start up capital was originally liable for Khums for any reason, such a it may have been lying idle in his hands for over a year, without payment of Khums tax. It maybe the case that it was of profits made by the mukallaf on which Khums was not paid. It also could be that the capital money was tainted with illicit money, and so forth.

When Khums is calculated at the end of the year, capital equipment and another similar means of production have to reflect the amount of depreciation. That is, if the due date of the tax year the machine is worth less than its purchase price, the current value has to be adopted for the sake calculations.

What profits should carry Khums liability?

114. No Khums shall be paid forthwith on profit generated by capital on which Khums was paid. The mukallaf may wait until the date of his financial year, or until one year has elapsed sine the profit was first made, if he does not have a specific date for his financial year. The reason being that during the waiting period, i.e. until the first anniversary, the mukallaf has the right of disposal over what profits he has made during the year. He may, if he so wishes, pay for the expenses for his provisions and pay back debt, even if it was for previous years. He is allowed to deduct any expenses he incurred in the production process, such as rent, wages, fuel, and so on.

For example, the turnover of (x) business is twenty thousand (x – currency). Allowing for, say, eight thousand which he spent on his expenses (personal allowance) and four thousand operating cost, what should be Khums taxed is the remainder, i.e. eight thousand.

115. It is not obligatory on the mukallaf, who has different sources of income,, to itemize profit, i.e. by choosing a (tax) date for each and every type of profit he makes. That is, regardless of the type of business and the sub-divisions of any one type of business.

116. Allowing for capital expenditure is not confined to the profit made during the year the expenditure was made. That is, if profit was not forthcoming only in, say, any number of years, it should be taken into account when made.

117. Just as capital expenditure is deducted from the profits, so is any amount set aside to make up for any loss that may come up by the end of the year. Included in this any loss sustained by man, machine, materials, manufactured goods, depreciation of equipment, etc. (fixed/floating capital). The ruling in this regard is one, i.e. whether the loss was sustained is one go, in the year in hand, or was gradual, i.e. over the years.

118. The loss can be catered for from the profits of the year, whether it was sustained before any profits are made or after profits were made.

For example, a merchant invested fifty thousand (x- currency) in buying certain merchandise. He either sold some of it and made profit, or did not make any profit. The market price of the merchandise fell to forty thousand of the purchase price. He may as well have used some of this merchandise for his personal needs by an amount, say, equivalent to ten thousand. Or ten thousand worth of goods and made a profit of, say, twenty thousand. In all these examples, the merchant is allowed to indemnify the loss of ten thousand, which his initial capital has suffered, i.e. by topping up the shortfall in the capital. So, this leaves the merchant with Khums liability on the remaining ten thousand.

However, should the loss be carried forward to the following year, the new capital would be forty thousand. If any profit is made in the new year, it cannot be used to indemnify the loss.

This also applies in the case of total loss of capital; it could be indemnified from the profits made in the year and not from the profits of future years.