Zero-rated goods, in countries utilizing value-added tax (VAT), are products exempt from this value taxation. This exemption helps lower the cost of essential items.
Key Takeaways
- Zero-rated goods are products that are exempt from value-added taxation (VAT).
- Countries designate products as zero-rated because they are crucial 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
In most countries, the government mandates a domestic VAT requirement for goods and services. Generally, the total price of products sold includes the VAT as an additional charge to sales tax in most transactions. The VAT is a form of consumption tax helping governments generate revenue.
Countries utilizing VAT designate specific goods as zero-rated to ease the tax burden on essential and crucial items within the supply chain. Zero-rated goods are targeted to individual taxpayers and industries alike, ensuring fundamental goods remain affordable while promoting economic growth.
Examples of zero-rated goods are numerous and impact various sectors of society. Items often categorized as zero-rated include certain foods and beverages, donated goods sold by charity shops, equipment for the disabled, prescription medications, water, sewage services, books, children’s clothing, and other necessities.
In manufacturing, for example, zero-rated goods are often essential ingredients or materials in production chains, allowing companies to benefit from reduced prices. Hence, they contribute significantly to lowering end-product costs and providing some competitive advantages.
Overall, zero-rated goods play a pivotal role in reducing the total purchase price, easing financial strain, particularly in high-tax locales. For example, in the United Kingdom, the VAT rate is often 20%, and sometimes 5%, making the absence of VAT on zero-rated goods a substantial economic benefit.
International Dealings with Zero-Rated Goods
When goods are transported from one country to another, VAT is typically assessed along with any import or export tariffs. However, when it comes to zero-rated goods, they are not subject to such international VAT, reducing the overall cost of transfer and making international trade for essential goods more viable.
Exempt Goods
In addition to zero-rated goods, some goods and services are also entirely exempt from VAT. Exempt goods do not incur VAT charges under specific circumstances or designated economic directives. These may include sectors that serve the public interest such as finance, insurance services, certain land and building supplies, medical and dental care, social services, and education.
Zero-Rated Goods: An Inspiring Example
Necessities such as food items, sanitary products, and animal feeds are often zero-rated, making them more accessible to lower-income individuals. A notable example occurred in 2018 in South Africa.
An independent panel at the University of Stellenbosch recommended expanding the country’s existing list of zero-rated food items due to an increase in the VAT rate from 14% to 15%. The panel proposed adding items like white bread, various flours, baby and adult diapers, sanitary products, and school uniforms. Headed by economics professor Ingrid Woolard, their recommendation aimed to ameliorate the financial pressure on lower-income households.
These efforts supplemented a prior list that included nineteen zero-rated food items such as brown bread, fruits, vegetables, dried beans, rice, lentils, maize meal, milk, eggs, fish, mealie rice, and vegetable oil, significantly benefiting those economically disadvantaged.
By incorporating more goods into the zero-rated category, economies can forge stronger financial resilience, ensuring essential goods remain affordable and within reach.
Related Terms: Value-Added Tax, Supply Chain, Sales Tax, Exports, Tariffs.
References
- U.K. Government. “VAT rates”.
