What are Zero-Rated VAT Items
Zero-rated items are exempt from Value Added Tax VAT. This does not mean that Zero-rated items don’t have to be reported to SARS. Zero-rated items still must be declared on the VAT201 even though they are exempt from VAT.
- VAT makes a difference between zero-rated supplies (taxable supplies with 0% VAT) and exempt supplies (not taxed with VAT).
- Zero-rated supplies are taxable, allowing vendors to claim input tax deductions and register as vendors, potentially leading to VAT refunds.
- Exempt supplies are not subject to VAT. Vendors are unable to claim input tax deductions on expenses related to exempt supplies. This can have an impact on cash flow and profits.
VAT is a levy imposed on the purchase of goods or services. It is charged by businesses when they sell goods or services as part of their business activities.
For VAT purposes, we treat all supplies as either standard rated, zero-rated, or exempt. Supplies that are standard rated or zero-rated are “taxable supplies” as defined.
Standard rated supplies are supplies that are subject to VAT at the prescribed rate of 15%. Most goods and services are taxed at the standard rate of VAT. Some items are exempt or zero-rated under the Value-Added Tax Act of 1991.
VAT is levied at the rate of 0% on a zero-rated supply, which is a taxable supply. Even though the supply is classified as a taxable supply, VAT is only charged at a rate of 0%. Even if no VAT is charged on a supply, it is still part of a vendor's business activities. This means no tax is owed to the South African Revenue Service for zero-rated supplies.
Zero-rating is only granted to specific transactions that serve certain objectives considered more significant by the Government than collecting additional VAT. Zero-rated transactions mostly involve exporting goods or services, aiming to boost exports and global competitiveness.
Section 11 of the VAT Act sets out specific instances of supplies of goods and services that may be zero-rated. Zero-rated items include certain foods, exporting goods, and selling a business as a going concern. Providing services to non-residents outside South Africa, services performed offshore, and specific international transportation services are also zero-rated.
An exempt supply is the supply of goods or services upon which neither VAT at the standard rate nor zero rate is chargeable. Therefore, no VAT is levied on exempt supplies. An exempt supply is not a taxable supply and the term “enterprise” as defined in the VAT Act therefore specifically excludes the making of exempt supplies.
Section 12 of the VAT Act specifically provides for supplies that constitute exempt supplies. Some examples of essential services are housing, public transportation, education, childcare, and financial services.
Most exemptions justify themselves on the basis that they are so-called merit goods, such as education. However, some goods are exempt because people perceive them as difficult to tax, such as financial services. The exemption for public transport in South Africa was necessary. Many small informal taxi operators would struggle to follow the regulations. This is why the exemption was justified.
The confusion between zero-rated and exempt supplies arises because neither type of supply has VAT charged by vendors. In practice, people often use the terms for supplies from a vendor interchangeably without realizing the importance of the difference.
Conclusion
It is important to know the distinction between zero-rated and exempt supplies for VAT purposes. This will help vendors apply the correct treatment. Zero-rated supplies are subject to VAT at a rate of 0%. Exempt supplies, on the other hand, are not subject to VAT. Understanding this difference is crucial for vendors to comply with VAT regulations.
A zero-rated supply is still subject to VAT, but the VAT rate is 0%. A registered vendor can deduct input tax on expenses for making zero-rated supplies. This allows them to recover the VAT paid on those expenses.
On the other hand, an exempt supply is simply not subject to VAT. A supplier cannot claim tax deductions for expenses related to exempt supplies. They must pay any VAT on these expenses themselves.
The difference between zero-rated goods and services and exempt supplies can significantly impact a business’s cash flow and profitability. Businesses that sell tax-free items can receive a refund on some of the taxes they paid, which increases their profits.
However, businesses that sell items without tax are not eligible for this refund or a credit for VAT. But businesses that sell items with no tax cannot get that money back. Businesses must understand the distinction between zero-rated and exempt supplies. They should apply the appropriate VAT treatment to prevent penalties and boost profits.
Frequently asked questions
Which goods and services are Zero-rated
- Exports
- Basic food items
- Illuminating paraffin
- Goods subject to fuel levy
- International transport services
- Farming inputs
- Sales of going concerns
- Certain grants by government
- The sale of a going concern
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