Zakat Deduction and Exemption on Final Dividend in case of Unlisted Private Companies

Zakat Code for Companies

In Pakistan, companies that declare final dividends are required to deduct zakat according to the guidelines set in the Zakat and Usher Ordinance. The process involves a series of steps for calculating, applying, and submitting zakat to ensure compliance with the regulations.

Zakat Deduction Process

The method for calculating zakat is defined in the First Schedule of the Zakat and Usher Ordinance, specifically under Serial 8. Zakat is calculated at 2.5% of the paid-up value on the Valuation Date in each zakat year.

Application for Zakat Code

Once the zakat amount is calculated, companies are required to apply for a Zakat Code from the Ministry of Poverty Alleviation and Social Welfare. This Zakat Code is essential for submitting the zakat to the State Bank of Pakistan. The application is to be submitted on their address.

Submission of Zakat

Zakat must be submitted to the State Bank of Pakistan under the issued Zakat Code. For proper documentation, companies need to fill out Form CZ-08 and make three copies:

• One copy is submitted to the Central Zakat Admin, Islamabad.
• Another copy is submitted to the Central Depository and the State Bank of Pakistan.
• The third copy is retained for the company’s own records.

Zakat & Usher Collection and Refund Rules

Under Section 20 of the Zakat and Usher Collection & Refund Rules, certain shareholders can claim exemption from zakat deduction based on their faith and fiqh (jurisprudence).

Exemption for Certain Shareholders

Companies must collect a declaration from exempt shareholders on a stamp paper (minimum value of Rs.50/-). The declaration format is provided in Form CZ-50. Once the declaration is collected, the exempt shareholders will receive dividends without zakat deduction.

Zakat Deduction for Non-Exempt Shareholders

For individuals who do not qualify for exemption under Section 20, Zakat will be deducted on the net-of-tax value of the dividend.

Example: If an individual is entitled to a dividend of 100 and the applicable tax rate is 15%, the net-of-tax value would be:

                                                Rs.

• Dividend:                                100
• Tax deduction (15%):             15
• Net of tax value:                     85

Zakat will then be deducted at 2.5% of the net value, which in this case is 2.5% of 85, resulting in a zakat deduction. This process ensures that companies comply with zakat obligations while providing the necessary exemptions for eligible shareholders, ensuring fairness and adherence to the regulations set forth by the Zakat and Usher Ordinance.