Debts can be classified into two types:
- Receivables i.e. owed to oneself e.g. Loans given to somebody.
- Payable to others e.g. Money borrowed from somebody.
Debts receivable from others
There are different types of debt receivables. The ruling of Zakah for each kind of debt receivable is different from the other. It is therefore pertinent to first understand all these types of debts receivable.
Types of Debts Receivable
Imam Abu Hanifah (R.A.) has classified debts into three categories, namely:
- Trade Debts
- Non-Trade Debts
- Other Debts
1. Trade Debts are called dain qawiyy in the terminology of Islamic Jurisprudence. These debts are those that arise in respect of:
(a) Trading stock sold and delivered in the ordinary course of business;
(b) Moneys lent and advanced;
(c) The loan of gold and silver.
For example, a trader sells goods (on credit) to another for purchase price of Rs.5,000/-; or A lends B Rs. 10,000/-. The ruling for this class of debts is that the creditor, upon receiving the amount owing to him, is obliged to pay Zakah for the entire preceding period of credit.
2. Non-Trade Debts are called dain mutawassit These debts are those that arise in respect of the sale of goods other than the trading stock. For example, the purchase price of the sale of personal clothing, or motor vehicle or land.
The preferable view, which is one of the two views narrated from Imam Abu Hanifah, in the case of such debts1 is that Zakah is not payable for the preceding years but is only payable for the Zakah year calculated from the time of repayment of the debt.
3. Other debts are called dain Zaeef These debts are those that do not arise from the sale of goods or property. For example, debts receivables in respect of inheritance, dowry, rentals, wages, and provident fund payments.
The ruling for this class of debts is that Zakah is not payable unless full amount is paid and one Zakah year passes thereon after payment. No Zakah is payable for preceding years.
Debts payable to others
Zakah payer, in order to be sahib-un-nisaab, must be free of debts. If he is indebted to his creditors, then the amount of his debts must be deducted from the total value of those assets on which Zakah is levied. The balance remaining will be subject to Zakah. If there is no balance remaining, no Zakah is obligatory.
It should be kept in mind, that the ruling mentioned above regarding the treatment of debts payable is related to the person who is not a corporate businessman. However, if some one has a corporate business, then the ruling is that, only those debts are to be deducted from zakatable assets that have been utilized in purchasing fixed assets such as machinery etc. On the other hand, if debts of a corporate businessman are utilized in purchasing zakatable assets such as inventory etc., then they will not be deducted from the total value of the assets on which Zakah is levied.