Establishing Zakat on Oil and Gas in Malaysia

Paper Title: Establishing Zakat on Oil and Gas in Malaysia: A New Insight

Author: Pg Mohd Faezul Fikri Ag Omar, Haneffa Muchlis Gazali, Mohd. Nasir Samsulbahri, Nurul Izzati Abd Razak, Norhamiza Ishak.

Publisher: ISRA International Journal of Islamic Finance, Vol. 13 No. 3, 2021.

The purpose of this paper is to deliberate on the establishment of Zakat on oil and gas in Malaysia. Similar to gold and silver, oil and gas are valuable minerals, which, upon extraction, should be subject to Zakat payment. In Malaysia, however, this is not the case.

The authors argue that Zakat calculation for oil and gas can involve Nisāb adjustment, but not the Hawl (the requirement for one full Islamic year of ownership for the assets), by analogy with Zakat on agricultural produce.

The authors recommend that comprehensive legislation is needed to fine-tune the Malaysian oil and gas system, particularly with regard to Zakat.

The authors base their opinion after the two giant contemporary juristic experts, i.e. Yusuf Al-Qaraḍāwī and Wahbah Al-Zuḥailī. Being highly valuable liquid minerals, oil and gas should be subject to Zakat.

To determine their Zakat value, both minerals should be in their original state following extraction prior to being traded in the market. The inherent value of oil and gas is the main reason for their extraction.

Muslim scholars have indeed deliberated on Zakat on minerals, but not specifically on oil and gas. The general consensus is that Zakat applies on all forms of minerals, i.e. solid rock or liquid.

Al-Qaraḍāwī and Al-Zuḥailī pointed out that oil and gas are forms of minerals, and hence, Zakat is imposable upon them. Al-Qaraḍāwī added that oil is referred to as “black gold,” which emphasizes its value; he believes that if past scholars had known about its tremendous value, they would have reached a solid consensus on how Zakat is to be imposed on it.

Al-Qaraḍāwī further summarized the scholars’ opinions on the subject matter into three inferences. The first opinion is of the Shāfiʿī School, which asserted that “minerals,” as stated in the Qurʾān, refer specifically to gold and silver; hence, Zakat on minerals is only imposable on the two.

The second opinion is of Abu Ḥanifah, who stated that the only minerals on which Zakat is imposable are those that have been extracted from the earth and subsequently melted down, and this is deduced to be gold and silver.

The third opinion is of the Ḥanbalī School, which proclaimed that Zakat is applicable on all types and forms of minerals extracted from the earth. Al-Qaraḍāwī is more inclined to follow the third opinion, which he deems to be closer to the description in the Qurʾān.

Al-Zuḥailī also supported the Ḥanbalī opinion that Zakat is imposable on all liquid minerals. According to him, two conditions must be met for Zakat to be imposed on minerals: firstly, the mineral must reach the Nisāb after having been cleansed from residues; secondly, the Zakat payer must be a Muslim.

The obligatory Zakat rate on all extracted minerals is also divided into three opinions. The first opinion is of Abu Ḥanifah, who asserted that the rate should be 20% (one-fifth) according to the assertion of Prophet Muhammad (peace be upon him) that “one-fifth is due on rikāz.” He asserted that rikāz and minerals are not the same, but both are precious valuables found underground and hence would be similar in their Zakat rate.

The second opinion is of Shāfiʿī, who suggested a rate of 2.5% based on analogy with Zakat on gold and silver. The third opinion is of Imam Mālik, who asserted a Zakat rate of either 2.5% or 20%, depending on the cost and effort of extracting the minerals. A 2.5% rate is for minerals that require more cost and effort in extracting, while a 20% rate is for minerals that require lesser cost and effort.

Al-Qaraḍāwī follows the third opinion based on the grounds that every mineral necessitates different extraction approaches. The Mālikī viewpoint also discerns that extracted minerals belong to the bayt ul māl (the treasury of Islamic state governments). Al-Qaraḍāwī agrees with the view that such minerals should be managed by the public authority, with no private ownership.

The scholars agree that there is no Hawl (one-year Zakat maturity requirement) for Zakat on minerals, by analogy with Zakat on agricultural yields whereby Zakat is paid at the time of harvest. Zakat on minerals must, therefore, be paid instantly following its extraction and purification from residues. This Zakat payment approach is, hence, applicable to oil and gas as well.

The next discussion on the Nisāb of Zakat on minerals takes a more interesting turn, especially when the question is applied to oil and gas. Muslims scholars argued as to whether or not Zakat on minerals requires Nisāb. Al-Zuḥailī highlighted that while a majority of scholars agreed that minerals should be subject to Zakat, they must first reach a certain Nisāb.

The Ḥanafī viewpoint states that Nisāb is not required for Zakat on minerals because Hawl is not required as well. The Shāfiʿī and Mālikī Schools asserted that Nisāb is applicable for Zakat on minerals based on the Nisāb for gold and silver. Al-Zuḥailī and AlQaraḍāwī agreed with the view that Nisāb is required for Zakat on minerals.

By summarizing the key juristic discussion on this matter, this paper is an important contribution to explain how Zakat can be levied on oil and gas in Malaysia.