Zero-rated supplies: definition, types, examples
Zero-rated supplies are important for business taxes, and remote suppliers are particularly concerned. In this article, we’ll discuss what zero-rated supplies are, the difference between tax-exempt and zero-rated supplies, as well as which goods are zero-rated in some countries.
Let’s dive in.
What are zero-rated supplies?
Zero-rated supplies (which can be either goods or services) are supplies to which a VAT or GST rate of 0% applies, meaning that buyers do not pay any VAT on them.
Input tax credits still take into consideration zero-rated supplies, and companies can still claim input tax when purchasing them. This allows them to deduct input tax from the VAT (or GST) they need to remit.
Which supplies are zero-rated?
Zero-rated supplies are typically supplies that are used to create a different end product, and are an important element of its supply chain. They’re zero-rated in order not to overburden businesses with taxes.
In addition to that, some goods that are considered essential (such as food, medicine, water, etc.) are zero-rated in some countries, which makes them more accessible.
Exports are also zero-rated in many countries, in order to promote the exportation of goods or services to other countries, and make them more attractive for international clients.
Is zero-rated and tax-exempt the same thing?
Zero-rated supplies are not the same as tax-exempt supplies:
- Zero-rated goods or services are not taxed at the point of sale, but you can still claim a tax credit for input taxes and can make a deduction.
- In the case of tax exemption, it’s not possible to claim input credits for VAT or GST paid to produce the product or service. This affects the final price of the supplies.
The reverse-charge mechanism, which applies for B2B sales in the EU, is sometimes confused with the principles of either zero-rated supplies or supplies that are tax-exempt. When the reverse-charge mechanism is applied, though, it’s the buyer who declares VAT on the purchase, so it’s not equivalent to either one of the other two categories.
Zero-rated supplies in different countries
In the EU, zero-rated and tax-exempt supplies vary from country to country, but there are some that are tax exempt across all countries, as mandated by the European Commission.
Tax exemptions include education, medical and dental care, social services, financial services, insurances, and, in some cases, land and buildings.
Zero-rated supplies in countries with GST (goods and services tax), such as the US, Canada, India, New Zealand, Australia, and more, vary from country to country, as well, but in general, the principle is the same: businesses can claim input tax credits on zero-rated supplies.
In many countries across the world, many goods are zero-rated, such as:
- Basic food items, such as bread, vegetables, milk, fish
- Grain, wool, livestock
- Medication and medical devices
- Sanitary products
- Exports.
Fonoa Tax can help you calculate taxes
Fonoa Tax seamlessly automates indirect tax rate calculation in 80+ countries across the globe and takes into account revenue sellers made to each specific country. Revenue tracking helps us understand whether sellers need to register for VAT locally and start applying local VAT rates to their transactions.
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