What Are Zero-Rated Goods?
Let me explain zero-rated goods to you directly: in countries that apply value-added tax (VAT), these are products exempt from that tax entirely.
Key Takeaways
- Zero-rated goods are products exempt from value-added taxation (VAT).
- Countries designate products as zero-rated because they are leading contributors to other manufactured goods and a significant component of a broader supply chain.
- Often, goods and services that are zero-rated are those considered necessary, such as food items, sanitary products, and animal feeds.
- Examples of zero-rated goods include certain foods and beverages, exported goods, equipment for the disabled, prescription medications, water, and sewage services.
Understanding Zero-Rated Goods
You should know that in most countries, the government requires a domestic VAT on goods and services. From what I've seen in reported data, the total price of products sold includes this VAT, which acts as an additional charge to sales tax in most transactions. Essentially, VAT is a form of consumption tax.
Countries with VAT systems designate certain goods as zero-rated, and these are typically specific items. They do this because such products contribute significantly to other manufactured goods and form a key part of broader supply chains. Additionally, many food items fall into this category and are sold with 0% VAT.
Here are some examples you might encounter: certain foods and beverages, exported goods, donated goods sold by charity shops, equipment for the disabled, prescription medications, water and sewage services, books and other printed publications, and children's clothing.
In practice, buyers often use zero-rated goods in production, benefiting from lower prices without the tax. For instance, a food manufacturer might use these goods to make a product, but when you buy the final item as a consumer, it includes VAT.
Overall, the lack of VAT on zero-rated goods means a lower total purchase price. This can save you a significant amount of money. Take the United Kingdom, for example, where the standard VAT rate on most goods is 20%, and the reduced rate is 5%.
International Dealings with Zero-Rated Goods
When you bring a good from one country to another, whether personally or through shipment, there's usually an international VAT charge plus any import or export tariffs. However, internationally designated zero-rated goods avoid this international VAT, which lowers the cost of importing or exporting them.
Exempt Goods
You also need to distinguish exempt goods from zero-rated ones; some goods and services are reported as exempt from VAT. These are typically a focused group provided by sellers not subject to VAT.
For instance, the European Commission exempts items like finance and insurance services, and some land building supplies. Other examples include those serving the public interest, such as medical and dental care, social services, and education.
Zero-Rated Goods Example
Often, zero-rated goods and services are those deemed necessary, like food items, sanitary products, and animal feeds. Zero-rating them makes these items more affordable for lower-income consumers.
Consider this example: in 2018, an independent panel at the University of Stellenbosch in South Africa recommended adding several items to the country's list of zero-rated food items, including white bread, cake flour, bread flour, baby and adult diapers, sanitary products, and school uniforms.
This recommendation followed an increase in South Africa's VAT rate from 14% to 15%, a change opposed by many who viewed it as harmful to lower-income households. The finance minister at the time, Nhlanhla Nene, appointed the panel, headed by professor Ingrid Woolard, an economics teacher at the University of Stellenbosch.
The panel's suggestions expanded an existing list of 19 zero-rated food items, which already included brown bread, fruits, vegetables, dried beans, rice, lentils, maize meal, milk, eggs, fish, mealie rice, and vegetable oil.
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