Definition

Zakat on Cash is a mandatory Islamic wealth tax calculated at 2.5% of liquid cash holdings that businesses owned by Saudi or GCC nationals must pay annually. Cash is always zakatable under Islamic principles and includes all cash and bank balances that have been in possession for a complete lunar year. This religious obligation serves as both a spiritual purification of wealth and a systematic redistribution mechanism to support societal welfare.

Key Features/Components

• Fixed Rate Calculation: Zakat is calculated at 2.5% of the Zakat base for businesses following the Hijri financial year and approximately 2.57% for those following the Gregorian financial year

• Nisab Threshold: Cash holdings must meet the minimum threshold (nisab) equivalent to 87.48 grams of gold or 612.36 grams of silver before Zakat becomes obligatory

• Lunar Year Requirement: Zakat is due after cash has been held for one complete Islamic lunar year (354 days) above the nisab threshold

• Liquid Asset Focus: Includes all forms of liquid cash: bank balances, cash on hand, and readily accessible funds, but excludes fixed assets and operational equipment

Application in KSA

Saudi Arabia implemented new Executive Regulations for Zakat Collection through ZATCA's Ministerial Resolution No. 1007, effective for fiscal years starting January 1, 2024. The regulations apply to businesses owned by Saudi or GCC nationals meeting the Kingdom's residency requirements. For mixed-ownership companies, only the Saudi/GCC portion of cash holdings is subject to Zakat, while non-Saudi portions face income tax. The new regulations introduce stricter methodologies for calculating the Zakat base and align calculations with financial statements' closing balances.

Compliance Requirements

Businesses must register with ZATCA and file annual Zakat returns within prescribed deadlines. Companies must submit Zakat declarations through ZATCA's official website and make payments using the SADAD system. Under the new regulations, businesses must maintain detailed documentation to support Zakat calculations and may apply the new methodology to prior fiscal years with ZATCA approval. Companies must accurately identify all zakatable cash assets including trade receivables and liquid investments.

Common Challenges

Accurate Asset Classification: Determining which cash holdings qualify as zakatable versus operational necessities can be complex, especially when distinguishing between liquid assets and reserves needed for immediate business operations.

Fluctuating Cash Balances: Businesses must track whether cash holdings remain above the nisab threshold at both the beginning and end of the Zakat year, even if balances fluctuate during the period, requiring consistent monitoring systems.

Mixed Ownership Calculations: For companies with both Saudi and non-Saudi ownership, accurately calculating the proportional Zakat liability on cash holdings while separating income tax obligations can present computational challenges.

Best Practices

Implement Systematic Tracking: Establish robust cash management systems that monitor daily balances and automatically flag when holdings approach or exceed nisab thresholds. Cloud accounting platforms like Mezan provide comprehensive financial analysis tools that help streamline Zakat on cash calculations and efficiently manage financial data.

Maintain Comprehensive Documentation: Keep detailed records of all cash movements, bank statements, and supporting documentation as required under the new ZATCA regulations. Regular reconciliation of cash positions ensures accurate Zakat base calculations and demonstrates compliance during audits.

Establish Clear Calculation Procedures: Develop standardized procedures for identifying zakatable cash assets, applying appropriate deductions for immediate liabilities, and calculating the 2.5% obligation to ensure consistent and accurate annual assessments.

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For expert guidance on Zakat on Cash calculations and compliance, consider consulting with qualified tax and business advisors.