THE SYSTEM OF ZAKAT COLLECTION AND DISBURSEMENT IN PAKISTAN By Muhammad Akram Khan makram1000@gmail.com 1. INTRODUCTION The government of Pakistan introduced compulsory levy of Zakat after the promulgation of Zakat and Ushr Ordinance 1980 (No. XVIII of 1980). The Ordinance visualized deduction of Zakat at source from income ensuing from eleven types of assets and exempted almost an equal number of assets from compulsory levy of Zakat.1 The law visualizes a simple organization with least administrative cost. It requires various financial institutions, industrial, business and organizations to deduct Zakat and deposit it in the account of Central Zakat Council maintained at the State Bank of Pakistan. The Zakat deduction organizations have to deduct the Zakat at the time of paying a return, dividend, interest or profit to the owners of financial assets. There are thousands of branches of the banks that deduct Zakat at source on the 1st of Ramadan every year. These branches of the banks transfer the amount so deducted to their controlling offices, termed as Zakat Collection Controlling Agencies (ZCCA)2, which are 76 in number. In December 2002, there were 2275 companies (other than banks) and other organizations that deducted Zakat from dividend at source and transferred it to the State Bank of Pakistan. The disbursement of Zakat takes place by transfer of funds to Provincial Zakat Councils, which in turn transfer it to District Zakat Committees. There were four provincial and two federal territories for which zakat councils existed. Similarly, there were 109 District Zakat Committees, one for each district. The actual disbursement of Zakat takes place at local level when the District Zakat Committees transfer funds to Local Zakat Committees. By end of 2002, there were 39762 Local Zakat Committees in Pakistan. Besides, the Central Zakat Council allocated funds to 105 District Headquarters Hospitals and 76 National Level Health Institutions. All these organizations were supposed to keep separate accounts for the zakat funds received from the Central Zakat Council and disbursed among the beneficiaries. These accounts were subject to audit. 1
For an abridged list of the two types of assets, see annex-1 to this paper. The zakah law terms them as Zakah collection and controlling agencies (ZCCA), while the Zakah Manual terms them as Zakah deduction and controlling agencies (ZDCA). In this paper we have adopted the former term. 2
2. ORGANIZATIONAL STRUCTURE 2.1 Central The collection and disbursement is the responsibility of the Central Zakat Administration (CZA) based in the federal Ministry of Religious, Zakat and Ushr and Minority Affairs. Administrator-General of Zakat is the executive head of the function. The CZA works under the control of Central Zakat Council (CZC). The CZC consists of 18 members as follows: Chairman to be a sitting or retired judge of the Supreme Court, four nominees of the President, three of which are to be ulema, one nominee from each provinces, two women, four chief administrators of zakat in each province, secretaries of Ministries of Religious Affairs, Health, Education and the Administrator General of Zakat as secretary of the Council. The federal government appoints these members for a period of three years. 2.2 Provincial In each province, the management of zakat function is the responsibility of the Provincial Zakat Administrator (PZA). The PZA works under the control of the Provincial Zakat Council, appointed by the provincial government. The PZC consists of a Chairman, to be sitting or retired judge of the High Court, five nominees, three of which to be ulema, of the Governor, two women, secretaries of departments of Finance, Local Government, Social Welfare Departments, and Provincial Zakat Administrator as Secretary of the Council. The members are appointed for three years. 2.3 District In each district, including Islamabad Capital Territory (ICT), a District Zakat Committee (DZC) manages the zakat function. The PZC constitutes the DZC. The DZC consists of chairman, the District Officer (Revenue), two women, one non-official member from each Tehsil or Taluka or sub-division and District Zakat Officer, as secretary to the DZC. The members of the committee hold office for a period of three years. 2.4 Tehsil The law also provides for a system of Tehsil, Taluka or Sub-division Zakat and Ushr Committees. However, in practice, they do not exist. 2.5 Local The zakat disbursement takes place at local level. A Local Zakat Committee (LZC) is responsible for this function at each union council level. The LZC consists of nine members, of whom two are to be women selected by the locality, besides the seven male members to be selected by the community in a meeting to be held in the mosque. This meeting is organized by the DZC and in it are present at least one gazetted officer, one alim e deen, and one member of the DZC. Members of the LZC hold office for three years. 3. CENTRAL ZAKAT FUND Zakat collections come from the following sources:
• • • • •
Zakat deducted at source Voluntary payments of zakat Transfer from Provincial Zakat Funds Transfers from District Zakat Funds Grants, Donations, etc
All zakat collected or deducted at source by financial institutions, companies, government accounts offices or any other institution is deposited in the Central Zakat Fund Account No. 8, maintained at the State Bank of Pakistan (SBP) or with the National Bank of Pakistan who acts as an agent of the SBP. The CZC approves annual budget for allocation of funds to various provinces. The standing ratios for allocation are as follows: Table 1 Province Punjab Sindh NWFP Baluchistan Islamabad Total
Share of Provinces in the Central Zakat Fund Share (%-age) fixed on 4 Nov. 2000 56.95 23.53 13.78 5.11 0.63 100
The provincial allocations are transferred to respective Provincial Zakat Funds. The PZC of each province allocates these funds to DZCs, which in turn, provide funds to LZCs for disbursement to beneficiaries (mustahiqeens) on the basis of need. General guidelines for distribution of zakat fund are as follows: Table 2: Guidelines for Zakat Distribution Head of Account Percentage share Subsistence Allowance 60 Educational Institutions 18 Deeni Madaris (religious education) 8 Health Institutions 6 Social Welfare Institutions 4 Others 4 Total 100 4. RATES OF ASSISTANCE Following are existing rates of assistance. Table 3 Rates of Assistance Head of account Rate (Rs)
Remarks
Subsistence Orphans, widows, handicapped
500 per month
Education
Class 1-8 Class 9-10 Intermediate & graduate classes Post graduate Professional education Hifz and nazira Mawquf alaih Daura hadith Vocational training Grant for vocational training Health Outdoor patients Indoor patients Rehabilitation Grant Marriage grant for poor girls
Orphans below 18 years. Widows without any other source of income. Handicapped without ability to earn a living. Of the total: 50 % for primary education, 25% for science, arts and professional, and 25% for higher education.
50 per month 75 per month 250 per month 500 per month 583 per month 100 per month 250 per month 500 per month 500 per month 3000 one-time
For religious education For religious education For religious education
400 per patient 1000 per patient 5000 one-time 10000 one-time
5. PERMANENT REHABILITATION SCHEME In 2001, the Ministry of Religious Affairs announced a scheme for permanent rehabilitation of the needy persons by providing them support for becoming earning hands so that they are able to move above the poverty line without external help. The scheme visualized three packages for assistance. Each package consists of a set of smallscale business or service. The beneficiaries are supposed to get the help from the zakat fund and engage in the business or service activity. The rates for these packages are as follows: Table 4 Package A
Permanent Rehabilitation Scheme Packages Rate of Assistance (Rs) Purpose 20000-50000 Agricultural, animal husbandry, weaving, spinning, stitching, milling,
B
10000
C
5000-10000
sawing, transportation, etc Hawkers, vendors with education up to primary class Skilled or semi-skilled workmen such as electricians, plumbers, and carpenters, with education level not below middle class.
6. BASIC DOCUMENTS The auditors should familiarize themselves with the following basic documents: 1. Zakat and Ushr Ordinance, 1980 ( No. XVIII of 1980) as amended from time to time. 2. Zakat Collection and Refund Rules 1981 as amended from time to time. 3. Zakat Manual, June 1982 issued by the Central Zakat Administration 4. Zakat and Ushr Order for Northern Areas, 1982 as amended from time to time. 5. Zakat and Ushr Act, Azad Jammu and Kashmir, 1985 as amended from time to time. 6. Ushr Manual, December 1983 issued by the Central Zakat Administration 7. Minutes of the meetings of the Central Zakat Council 8. Minutes of the meetings of the Provincial Zakat Councils 9. Minutes of the meetings of the District Zakat Committees 10. Audit reports of the past years.
6. ZAKAT ACCOUNTING The Zakat and Ushr Ordinance 1980 makes it the responsibility of the AdministratorGeneral, the Chief Administrators, the District Committees and the Local Committees to maintain accounts of Central, Provincial, District and Local Zakat Funds respectively in such form and manner as may be prescribed. However, there are detailed administrative instructions about the deduction and transfer of Zakat funds. These instructions are available in the Zakat Manual and various office orders and procedures issued by the CZC, PZCs, and DZCs. The auditors should familiarize themselves with these instructions. The Zakat collection and controlling agencies are supposed to devise suitable systems for ensuring that the Zakat deducted and transferred to the government account is correct. The Central Zakat Administration has prescribed forms for deducting the zakat and its transfer to the State Bank of Pakistan.
The Zakat Manual, prescribed by the Central Zakat Council, has prescribed detailed proformas (CZ-1 to CZ-29) for recording deduction, refunds and transfer of zakat by the zakat deducting offices to their respective controlling agencies. In turn, the Zakat Collection and Controlling Agencies are required to submit a quarterly summary to the State Bank of Pakistan along with the zakat deducted under intimation to Central Zakat Administration. The Central Zakat Administration gets information from two sources: the Zakat Collection and Controlling Agencies and the State Bank of Pakistan. It has, thus, a mechanism to reconcile the information from the two sources and to track down any discrepancies. The receipts into and payments from the zakat funds are recognized as and when they actually take place. The basis of accounting for zakat is cash and not accrual. This is very much in line with rest of the government accounting. The zakat accounts are maintained on basis of single entry bookkeeping. The zakat law, zakat rules and the Zakat Manual prescribe detailed instructions and rates for calculating the amount of zakat to be deducted at source. They also lays down rules for exemption, refunds and rebates. The rules are quite clear and easy to apply. The Zakat Manual has prescribed a chart of account, which enables the zakat deduction offices and controlling agencies to classify the transaction appropriately. The receipts are classified according to the type of asset and the controlling agencies. The payments are classified according to the location of disbursement, like provinces, districts and local committees. The State Bank of Pakistan is required to maintain an account of zakat receipts and payments on a weekly, monthly and yearly basis. Besides the broad classification system that the Manual prescribes, there is no disclosure standard about the presentation of accounting information. 7.1 Final Accounts The Accounts Directorate of the Central Zakat Administration prepares the final accounts of the Central Zakat Fund. The final accounts give a summary view of the receipts from all zakat collection and controlling agencies and all disbursements made directly to beneficiaries by local committees or indirectly through institutions. It works out a final balance of the Central Zakat Fund. 7.2 Accounting Controls The Zakat Manual provides for reconciliation of accounting information from the two sources: State Bank of Pakistan and the Zakat Collecting and Controlling Agencies. The Accounting Directorate of the Central Zakat Administration is supposed to carry out this reconciliation on a monthly basis. The procedure also provides for a monthly reconciliation of accounts with the bank kept by each local zakat committee. The Zakat Manual also prescribes preparation of an annual budget, which acts as a tool for controlling the disbursements.
The State Bank of Pakistan does not allow any overdraft on the Central Zakat Fund account. All transfers down to the beneficiaries are made through banks and by cross cheques. There are detailed controls regarding the operation of bank accounts, maintenance of various registers and safe custody of cash and cheque books. The Zakat Manual gives detailed instructions for maintenance of cash book at the local zakat level. These instructions are mostly similar to the instructions in the Federal Treasury Rules of the Government of Pakistan. 7.3 Information Flows The flow of accounting information for collection is from the zakat deduction offices to zakat collection and controlling agencies to State Bank of Pakistan to Central Zakat Administration. The flow of information about disbursements is the other way round. It starts from the Central Zakat Administration to provinces, Districts and Local Committees. The detailed accounting for collection is done at the level of zakat deduction offices and for disbursements at the local level. There are detailed instructions for consolidating this information from the grass-root level to the central level. The local zakat committees provide information to districts, where it is consolidated for the district level. The provinces consolidate information for the province, and at the center, this information is consolidated for the whole of country. The consolidated statements are prepared every six months and then aggregated for the whole year. The flows of information regarding collection and disbursement are shown in the following figures.
ZDO
CZA
ZCCA
SBP
Reconcil iation
Fig.1 Information flows for collection of Zakat Legend: ZDO: Zakat Deducting Offices ZCCA: Zakat Collection Controlling Agencies SBP: State Bank of Pakistan CZA: Central Zakat Administration CZA
PZA
DZC
LZC
Fig.2 Information flows for disbursement of Zakat Legend: CZA: Central Zakat Administration PZA: Provincial Zakat administration DZC: District Zakat Committee LZC: Local Zakat Committee Broken Arrow: reverse information to higher level. As the information moves to higher levels, it is summarized until at the Central Zakat Administration level, it is in the most aggregated form. 7.4 Accounting in Practice The Central Zakat Administration at Islamabad has a Director of Accounts assisted by three accounts officers and two clerks. All these persons are on secondment from the Department of the Auditor General. The three accounts officers are qualified SAS accountant (having passed subordinate accounting service examination). The Central Zakat Administration prepares accounts according to lunar calendar. After the month of zulhajj each year, the directorate of accounts takes about three months to work out final balances. 8. BOOKS OF ACCOUNTING RECORD 8.1 Central Zakat Fund Following are the main accounting records. CZ-1 &2 CZ- 4 CZ-8 &15, 16,17,22 CZ-12 CZ-13 CZ-18,19,20,21 CZ-29
Zakat deduction record Refund of zakat Zakat deducted at source Register of cheques and other financial instruments Register of payments Abstract of weekly and monthly receipts in CZF Voluntary collections, donations
8.2 Provincial Zakat Fund Following are the main accounting records; PZ-6 PZ-2 PZ-3 PZ-4 &21
Cash book Register of cheques Register of payments Monthly accounts
PZ30-33
Dead stock register Progress reports from districts, NGOs, deeni madaris, health institutions, etc
8.3 District Zakat Fund It has the following accounting records; Cashbook Register of cheque books Cancelled cheques Payment register Minutes of meetings 8.4 Local Zakat Fund It has the following accounting record. Cash book Register of payments Register of beneficiaries Minutes of meetings Similar to LZC, the health Institutions, the NGOs, the deeni madaris and any other organization disbursing zakat, are responsible for maintaining the same record as a an LZC for the local zakat fund. 9. ZAKAT AUDIT The Zakat and Ushr Ordinance 1980 makes it obligatory for the Central and Provincial Zakat Councils to request the Auditor General of Pakistan and Local Fund Audit to conduct audit of central and provincial and district zakat funds. Such a request could be made annually or at shorter intervals. Section 11(7) of the Act makes it obligatory for the Auditor General to conduct the audit of central, provincial, district, and local zakat funds besides the audit of zakat deducting agencies and institutions receiving akat. For carrying out this audit, the Auditor General has set up a Directorate for Zakat Audit with a Director as its head. The directorate is located at Islamabad with a small branch office at Lahore. The audit of Zakat funds by the Auditor General provides an independent check, which is an essential requirement for all audits. The zakat law says that the zakat audit reports would be placed before the parliament.
ANNEX-1 LIST OF ASSETS SUBJECT TO COMPULSORY LEVY OF ZAKAT 1. 2. 3. 4. 5. 6. 7. 8.
Saving bank accounts Notice deposits receipts and accounts Fixed deposit receipts Saving deposits/ saving certificates Units of National Investment (Unit) Trust Investment Corporation of Pakistan mutual funds Government securities Securities including shares and debentures of companies on which return is payable periodically 9. Annuities 10. Life Insurance Policies 11. Provident funds LIST OF ASSETS EXEMPT FROM COMPULSORY LEVY OF ZAKAT 1. Gold and silver 2. Cash 3. Prize bonds 4. Current accounts and foreign currency accounts 5. Loans receivable 6. Securities and shares not subject to compulsory deduction under the first schedule 7. Stock-in-trade 8. Agricultural and horticultural products 9. Animals fed in pastures 10. Mineral production 11. Bovine animals 12. Camels 13. Fish and other catch of the sea