Is it possible to pay zakat by providing a service proportionate to the amount of zakat, or does it always have to be paid in cash?

In the Name of Allah, the Beneficent, the Merciful,

All praise is due to Allah, and may peace and blessing be upon the Messenger of Allah, upon his household, his companions and those who follow him. To proceed:

The basic rule is that Zakat ul-Mal should be paid in kind; there should be no deviation from this procedure, except when there would be a clear benefit for the recipient. The People of Knowledge have differed over the permissibility of deviating from the obligatory form to an alternative for Zakat, there being several different stances, the most correct of which is that it is permissible, provided that the other form would be better for the recipient than the actual item obligatory in Zakat. In fact, in such a case, paying the equivalent value in another form would be preferable to giving the actual item owed.

Among the supporting evidence for this ijtihad is the saying of Muadh to the people of Yemen: “Bring me goods: clothing, khamis (a type of Yemeni garment) or something like it, for the Zakat, in place of barley and corn. This is easier on you and better for the companions of the Prophet (blessings and peace be upon him) in Medina.” This narration of Muadh’s was mentioned by Al-Bukhari as interrupted evidence [missing the explicit link to the Prophet] for giving Zakat in another form of equivalent value. His mention of this in the form of supporting evidence necessarily indicates its strength according to him. Those who reject the use of this piece of evidence on the basis that it is merely the opinion of Muadh and therefore not authoritative proof, can be countered on two points: firstly, it should more than likely be assumed that the Prophet (blessings and peace be upon him) knew of this and approved of Muadh’s actions since the clothing was sent to him in Medina. If we were to suppose that he did not know about it — which is the second possibility — we still know that the Prophet (blessings and peace be upon him) bore witness that Muadh was the most knowledgeable of the Companions concerning the lawful and the prohibited.

And Allah knows best.