Zero-Rated Goods: Definition and Examples (2024)

What Are Zero-Rated Goods?

Zero-rated goods, in countries that use value-added tax (VAT), are products that are exempt from that value taxation.

Understanding Zero-Rated Goods

In most countries, the government mandates a domestic VAT requirement for goods and services. In most reported data, the total price of products sold in a countryincludes the VAT and is an additional charge to sales taxin most transactions. The VAT is a form of consumption tax.

Countries usingVAT designate certain goods as zero-rated goods. Zero-rated goods are typically individualized items. Countries designate these products as zero-rated because they are leading contributors to other manufactured goods and a significant component of a broader supply chain. Also, many food items are identified as zero-rated goods and sell with 0% VAT.

Examples of items that may be zero-rated include certainfoods 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 many cases, buyers use zero-rated goods in productionand benefitfrom paying a lower price for the goods without the tax. A food manufacturer may use zero-rated goods in the manufacturing of a food product,but when the consumer buys thefinal product, it includes a VAT.

Overall, the absence of VAT on zero-rated goods results in a lower total purchase price for thegoods. Zero-rated goods can save buyers a significant amount of money. In the United Kingdom, for example, the standard VAT rate levied on most goods is 20%, and the reduced rate is 5%.

International Dealings with Zero-Rated Goods

When a consumer brings a good from one country to another, either individually or via a shipment, there is generally an international VAT charge in addition toany import or export tariffs due. Internationally designated zero-rated goods are not subject to international VAT, so the cost of importingor exporting them is lower.

Exempt Goods

Some goods and services are also reported as exempt from VAT. These exempt goods and services are typically a focused group provided by a seller that isnot subject to VAT.

The European Commission, for example, exempts goods such as finance and insurance services, and some land building supplies.Other examples of exempt goods are those that serve the public interest, such as medical and dental care, social services, and education.

Zero-Rated Goods Example

Often, goods and services that are zero-rated are those that are considered necessary, such as food items, sanitary products, and animal feeds. Zero-rating these items makes them more affordable for lower-income consumers.

For example, in 2018, an independent panel at the University of Stellenbosch in South Africa made the recommendation to add several items to the country’s list of zero-rated food items. White bread, cake flour, bread flour, baby and adult diapers, sanitary products, and school uniforms were some of the items.

The recommendation came on the heels of an increase in the VAT rate in South Africa from 14% to 15%, a move that was opposed by many, who saw it as harmful to lower-income households. The country's finance minister at the time, Nhlanhla Nene, appointed the independent panel, which was headed by professor Ingrid Woolard, who teaches economics at the University of Stellenbosch.

The panel’s recommendations expanded an existing list of 19 zero-rated food items, including brown bread, fruits, vegetables, dried beans, rice, lentils, maize meal, milk, eggs, fish, mealie rice, and vegetable oil.