Definition
Zero-rated goods and services refer to items or services that are taxable under value-added tax (VAT) legislation but are charged at a tax rate of zero percent. This distinguishes them from exempt supplies, where no VAT is chargeable, and the producer cannot reclaim input VAT on associated costs. With zero-rated goods and services, businesses can reclaim any VAT they have paid on purchases directly connected to these supplies.
Examples of Zero-Rated Goods and Services
1. Most Food Items:
Food articles such as vegetables, meat, dairy products, and bread typically attract a zero VAT rate in many jurisdictions.
2. Sewerage and Water Services for Non-Industrial Users:
Basic utilities essential to non-commercial consumers, like water supply and sewer services, are often zero-rated.
3. Periodicals and Books:
Printed publications, including newspapers, magazines, journals, and educational materials like books, may be zero-rated.
4. Certain Charitable Supplies:
Goods and services provided by eligible charitable organizations for the purpose of fundraising or welfare might be zero-rated.
5. New Domestic Buildings:
The sale of newly constructed residential properties can attract a zero VAT rate.
6. Transport Fares:
Public transportation, especially for vehicles designed to carry not less than 10 passengers, is frequently zero-rated.
7. Banknotes:
Currency like cash and coins is usually zero-rated.
8. Drugs and Medicines:
Pharmaceuticals considered essential and prescribed commonly attract a zero VAT rate.
9. Children’s Clothing and Footwear:
Clothing and footwear specifically designed for children are often zero-rated.
10. Fuel for Air Ambulances and Lifeboats:
Specialized fuel used by critical emergency services vehicles like air ambulances and lifeboats can be zero-rated.
11. All Exports:
Goods and services exported out of a country are typically zero-rated to enhance competitiveness in international markets.
Frequently Asked Questions (FAQs)
What is the difference between zero-rated and exempt supplies?
Zero-rated items are taxable at a VAT rate of 0%, allowing businesses to reclaim any VAT paid on supplies or inputs. Exempt supplies are not taxable, and businesses cannot reclaim the VAT on related inputs.
Can businesses claim input VAT on zero-rated goods and services?
Yes, businesses dealing with zero-rated goods and services can reclaim the VAT paid on input costs associated with producing these goods or services.
Why do governments zero-rate certain goods and services?
Zero-rating aids in reducing the cost burden on essential items, making them affordable while allowing businesses to maintain their input VAT credits.
Are all exports considered zero-rated?
Yes, as part of promoting free trade and competitive pricing in international markets, all exports are typically zero-rated.
How is zero-rating beneficial for consumers?
Zero-rating helps keep the prices of essential goods and services lower since the VAT component is zero, and businesses can pass on the cost savings to consumers.
How do zero-rated goods impact a business’s profit margins?
Zero-rated goods usually do not directly impact profit margins since the VAT rate on the final product is zero, though businesses benefit from reclaiming input VAT, reducing overall costs.
Related Terms
Value-Added Tax (VAT)
A consumption tax levied on the value addition at each stage of production or distribution of goods and services. It is commonly used in many countries worldwide.
Input Tax Credit
It allows businesses to deduct the VAT paid on inputs used in producing goods and services from the VAT collected on its sales.
Exempt Supplies
Goods and services not subject to VAT, where suppliers cannot reclaim VAT paid on inputs used to produce these goods or services.
Online Resources
HM Revenue & Customs (HMRC) on Zero-Rating and VAT:
The European Commission’s VAT Information:
U.S. Internal Revenue Service (IRS) analogous resources:
Suggested Books for Further Studies
- “Value-Added Tax: A Comparative Approach” by Alan Schenk, Victor Thuronyi, Wei Cui
- “The VAT Reader: What a Federal Consumption Tax Would Mean for America” by C. E. Steuerle, et al.
- “Value-Added Tax and Direct Taxation: Similarities and Differences” edited by Michael Lang, et al.
Accounting Basics: “Zero-Rated Goods and Services” Fundamentals Quiz
Thank you for exploring the details of zero-rated goods and services and quizzing your knowledge to deepen your understanding of this fundamental taxation concept!
