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.2 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. ORGANIZATIONAL STRUCTURE

2.1 CentralThe 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 ProvincialIn 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 DistrictIn 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 TehsilThe 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 LocalThe 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 Share of Provinces in the Central Zakat FundProvince Share (%-age) fixed on 4 Nov. 2000Punjab 56.95Sindh 23.53NWFP 13.78Baluchistan 5.11Islamabad 0.63Total 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 DistributionHead of Account Percentage shareSubsistence Allowance 60Educational Institutions 18Deeni Madaris (religious education) 8Health Institutions 6Social Welfare Institutions 4Others 4Total 100

4. RATES OF ASSISTANCE

Following are existing rates of assistance.

Table 3 Rates of AssistanceHead of account Rate (Rs) Remarks

SubsistenceOrphans, widows, handicapped

500 per month Orphans below 18 years. Widows without any other source of income. Handicapped without ability to earn a living.

Education Of the total: 50 % for primary education, 25% for science, arts and professional, and 25% for higher education.

Class 1-8 50 per monthClass 9-10 75 per monthIntermediate & graduate classes

250 per month

Post graduate 500 per monthProfessional education 583 per monthHifz and nazira 100 per month For religious educationMawquf alaih 250 per month For religious educationDaura hadith 500 per month For religious educationVocational training 500 per monthGrant for vocational training

3000 one-time

HealthOutdoor patients 400 per patientIndoor patients 1000 per patientRehabilitationGrant 5000 one-timeMarriage grant for poor girls

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 small-scale 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 Permanent Rehabilitation Scheme PackagesPackage Rate of Assistance (Rs) PurposeA 20000-50000 Agricultural, animal

husbandry, weaving, spinning, stitching, milling,

sawing, transportation, etcB 10000 Hawkers, vendors with

education up to primary class

C 5000-10000 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 Administration4. 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 Administration7. Minutes of the meetings of the Central Zakat Council8. Minutes of the meetings of the Provincial Zakat Councils9. Minutes of the meetings of the District Zakat Committees10. Audit reports of the past years.

6. ZAKAT ACCOUNTING

The Zakat and Ushr Ordinance 1980 makes it the responsibility of the Administrator-General, 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 ControlsThe 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 FlowsThe 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.

Fig.1 Information flows for collection of Zakat

Legend:

ZDO: Zakat Deducting OfficesZCCA: Zakat Collection Controlling AgenciesSBP: State Bank of PakistanCZA: Central Zakat Administration

ZDO

ZCCA SBP

CZA Reconciliation

CZA PZA DZC LZC

Fig.2 Information flows for disbursement of ZakatLegend: CZA: Central Zakat AdministrationPZA: Provincial Zakat administrationDZC: District Zakat CommitteeLZC: 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 PracticeThe 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 Zakat deduction recordCZ- 4 Refund of zakatCZ-8 &15, 16,17,22 Zakat deducted at sourceCZ-12 Register of cheques and other financial instrumentsCZ-13 Register of paymentsCZ-18,19,20,21 Abstract of weekly and monthly receipts in CZFCZ-29 Voluntary collections, donations

8.2 Provincial Zakat FundFollowing are the main accounting records;

PZ-6 Cash bookPZ-2 Register of chequesPZ-3 Register of paymentsPZ-4 &21 Monthly accounts

Dead stock registerPZ30-33 Progress reports from districts, NGOs, deeni madaris, health

institutions, etc

8.3 District Zakat Fund

It has the following accounting records;

CashbookRegister of cheque booksCancelled chequesPayment registerMinutes of meetings

8.4 Local Zakat Fund

It has the following accounting record.

Cash bookRegister of paymentsRegister of beneficiariesMinutes 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. Saving bank accounts2. Notice deposits receipts and accounts3. Fixed deposit receipts4. Saving deposits/ saving certificates5. Units of National Investment (Unit) Trust6. Investment Corporation of Pakistan mutual funds7. Government securities8. Securities including shares and debentures of companies on which return is payable

periodically9. Annuities10. Life Insurance Policies11. Provident funds

LIST OF ASSETS EXEMPT FROM COMPULSORY LEVY OF ZAKAT

1. Gold and silver2. Cash3. Prize bonds4. Current accounts and foreign currency accounts5. Loans receivable6. Securities and shares not subject to compulsory deduction under the first schedule7. Stock-in-trade 8. Agricultural and horticultural products9. Animals fed in pastures10. Mineral production11. Bovine animals12. Camels13. Fish and other catch of the sea