What is Zakat in Saudi Arabia?

Kingdom of Saudi Arabia adopts a distinctive double taxation system, including income tax and Zakat as a mandatory Islamic tax. For businesses dealing in KSA, Zakat is more than personal generosity; it is a vital financial obligation. Zakat tax is governed by Zakat, Tax, and Customs Authority (ZATCA), who make certain that Zakat is collected and utilized for the purpose of social welfare. These funds are distributed across poor, orphans or those in need. It additionally aids Islamic organizations and fosters overall social development. In our blogpost today we will thoroughly understand Zakat, how its calculated and best practices to pay Zakat in Saudi Arabia.

Understanding Zakat

Saudi Arabia is a nation shaped by centuries of Islamic heritage, hence applies Islamic principle more strictly than any other country. It was an integral part of Islamic laws since the time of Prophet Muhammad (PBUH) and its implementation dates back to early formation days of the Kingdom. The meaning of Zakat is “purification” in Arabic and it does play the role of financial purification by empowering the needy and driving social progress. Zakat being one of the five major pillars of Islam plays a foundational role in the Islamic laws. It is considered as a religious imperative that also operates as a regulated economic duty.

Over the years, the Saudi government has reshaped Zakat collection and distribution systems, adapting them to innovative economic frameworks. It is applied on both individuals and businesses, its fixed rate is 2.5% which is applied on a company’s Zakat base, it is obligatory solely for the businesses owned by Saudi citizens or citizens of Gulf Cooperation Council (GCC) countries. Zakat tax compliance may demand expertise and understanding to accurately comply with the legal Zakat Tax laws along with Income Tax.

The Legal Structure of Zakat in Saudi Arabia

Many Muslim Countries consider Zakat as a voluntary act rather than a legal law; however, Zakat in Saudi Arabia is a part of national fiscal policy. Therefore, KSA established ZATKA in 2021 to legally collect Zakat and distribute Zakat. ZATCA was formed by combining General Authority of Zakat and Tax (GAZT) and the Saudi Customs Authority with the aim to streamline Zakat Tax and align it with Saudi Arabia’s Vision 2030 economic reforms. Zakat Regulations under the authority of ZATCA shed the light on the following areas,

• The categories of Wealth subjected to Zakat
• The Precise and Methodical Calculation of Zakat
• Legal Compliance demands of Individuals and enterprises separately
• Penalties and fines for non-compliance of Zakat Tax.

It is made sure that Zakat is gathered and utilized according to the principles of Islam across the region to show its commitment with the Sharia Law.

Who is Required to Pay Zakat in Saudi Arabia?

It is obligatory to pay Zakat for,

• Muslim Individuals possessing wealth more than Nisab for a lunar year.
• Businesses owned by Saudi Nationals covering both partnerships and individual enterprises are obliged to pay Zakat on their net assets, despite of their ownership structure.
• Shareholders must pay Zakat on the profit made from shares in Saudi Companies.
• For corporations governed by both GCC and non-GCC residents need to pay Zakat to only Saudi portions and Income tax is paid on non-Saudi portions.

Exemptions:

• Entities operating in the oil and hydrocarbon sector are subject to taxation at levels higher than Zakat.
• Non-Saudi investors engaging in speculative trading of listed company shares in the Saudi stock market are not liable for Zakat but are taxed under income tax regulations.
• Companies engaged in natural gas investment are taxed under standard income tax rules instead of Zakat.

Calculation and Submission of Zakat for Businesses

Zakat base is the total amount of eligible finances exceeding the nisab. Zakat is calculated at a fixed rate of 2.5% on business’s Zakat bases, including the assets meeting the criteria of Zakat, such as liquid assets, gold, silver and other investments, it eliminates and short-term liabilities. A step-by-step process to calculate Zakat Include,

• Assessing assets eligible for Zakat: It includes Liquid assets like cash and credits, receivable incomes for sold goods and services, Inventory priced according to ongoing retail rates and investments planned to resale.
• Remove financial obligations: Calculate the deductible liabilities, including debts to be settled within a lunar year, pending payments, unpaid invoices and outstanding utility costs and tax payments.
• Calculating the Zakat Base: Zakat base is calculated by subtracting deductible liabilities from zakatable assets.
• Enforce the prescribed Zakat rate: Multiply the zakat base with 2.5 percentage to find out the Zakat rate.

The Zakat tax is paid to Zakat, Tax and Customs Authority (ZATCA) after the end of Zakat year and need to file Zakat return within 120 days after the end of year. After filling the return, a SADAD bill accompanied by a SADAD number is issued. This Zakat payment can be made via online banking or ATM as per your mode of convenience.

How Zakat Funds Are Utilized and Distributed

Once the zakat is received by ZATKA its is then allocated at various needful areas and economic welfare programs such as,

• Providing support to low-income families driven by poverty.
• Aiding the patients in need of medical and health care support
• Offering scholarships and educational support to students who cannot afford it.
• Supporting those struggling with unmanageable financial obligations.
• Helping Orphans or widows burdened by financial instability.

Zakat in Saudi Arabia is distributed according to the Islamic Guidelines. It plays a crucial role in uplifting the underprivileged and strengthening economic stability.

Modernizing Zakat Collection: Challenges and Innovations

Regardless of an organized system, there are still some obstacles faced during Zakat tax compliance such as,

• Many businesses seek to conceal portions of their assets which leads to non-adherence and evasion
• Making sure that Zakat funds reach to the actual designated recipients
• Financial downturns influencing Zakat contributions

Government of KSA continuously work to ensure that it evolve Zakat policies for a strict enforcement of Zakat Tax. They have also worked progressively towards technological integration along with Zakat systems. By utilizing the automation tools, blockchain technology, cloud-based systems and artificial intelligence, collection of Zakat has not just become accurate and efficient but also safeguarded from potential cyberthreats. Moreover, many businesses also face challenges while calculating and filling Zakat taxes specifically companies with low skilled workers.  The best solution of them is to offer training programs, integrate tech savvy tools or hire outsourced accounting services to assure compliance and precise calculation of Zakat Tax.

SS&CO Zakat and Accounting Services in KSA

As KSA is moving towards its Vision 2030 agenda the role of Zakat is revolutionizing, thus demands more skilled teams to look after the tax matters. Businesses struggling to calculate Zakat tax aligned with other taxes, can seek help from SSCOKSA Zakat and Accounting services. Being one of the top-tier accounting firms in KSA we have Zakat Expert accountants who not just help you calculate but also establish a Zakat and other taxes integrated system within your company. We have robust tools and innovative solutions that help you stay compliant with the Saudi legal laws. We will help you maintain proper financial records for zakat payments and calculations by reducing Zakat tax liabilities. Whether you are a business operated by Saudi or Non-Saudi officials, you need to bring us on board to thoroughly understand the dual tax framework of KSA and Unburden yourself from the stress of Tax legal regulations.