Zero-rated

3 key takeaways

• Zero rating applies to certain essential goods and services, making them more affordable.
• Businesses can reclaim VAT on zero rated goods or services, reducing their tax burden.
• Zero rating differs from VAT exemption, which does not allow for VAT reclamation.

What is zero rated?

Zero rating is a taxation policy applied to certain goods and services, which are taxed at a zero percent rate under value-added tax (VAT) systems. This means that while these goods and services are technically taxable, the tax rate is set at zero, resulting in no VAT being charged to the consumer. However, businesses providing zero rated goods or services can still reclaim the VAT they have paid on related inputs and expenses.

This policy is often used by governments to make essential goods and services more affordable for consumers. Common examples of zero rated items include basic foodstuffs, certain medical supplies, and books. The goal is to reduce the cost burden on consumers for these necessary items while supporting businesses by allowing them to reclaim VAT on their purchases and operational costs.

How does zero rating work?

In a VAT system, businesses charge VAT on the goods and services they sell and pay VAT on the goods and services they purchase from other businesses. Normally, the difference between the VAT charged and the VAT paid is remitted to the government. However, with zero rated goods or services, the process works slightly differently:

• Zero percent VAT: The final consumer is charged a zero percent VAT rate, effectively exempting them from paying VAT on these items.
• Reclaiming VAT: Businesses that supply zero rated goods or services can reclaim the VAT they have paid on related purchases and expenses, reducing their overall tax liability.

For example, a bakery selling zero rated bread does not charge VAT to its customers. However, it can still reclaim the VAT it paid on ingredients, equipment, and other business expenses, helping to lower its operating costs.

Examples of zero rated goods and services

• Basic food items: Many countries zero rate essential food items such as bread, milk, and fresh vegetables to keep them affordable for all consumers.
• Medical supplies: Certain medical products and equipment, such as prescription medications and wheelchairs, are often zero rated to support public health.
• Educational materials: Books, educational pamphlets, and sometimes even digital publications can be zero rated to promote education and literacy.

It’s important to note that zero rating is different from VAT exemption. While both mean no VAT is charged to the consumer, zero rating allows businesses to reclaim VAT on inputs, whereas VAT exemption does not.

For more on related topics, consider exploring VAT exemption, input tax credits, value-added tax systems, and tax policy. These subjects offer deeper insights into how tax mechanisms impact both businesses and consumers.