Zero-rated supplies are goods or services taxed at a VAT or GST rate of 0%, so the buyer pays no tax on them. The rate is set at zero, but the supply still counts as taxable, and that single distinction changes what a business can reclaim.
This guide covers the practical examples you'll see across most countries, how zero-rated supplies differ from exempt supplies, and how zero rating works specifically under GST.
What are zero-rated supplies?
Zero-rated supplies (which can be either goods or services) are supplies to which a tax rate of 0% applies, meaning that buyers do not pay any VAT on them.
Zero-rated supplies are generally considered taxable supplies. As taxable supplies, they are technically subject to VAT / GST, just at a rate of 0. This is distinct from an exempt supply, which is not subject to VAT / GST at all.
Because zero-rated supplies are taxable supplies, any input tax paid on goods or services purchased to make the supply is generally considered deductible.
Examples of zero-rated supplies
Most countries zero-rate a similar set of essentials, though the exact list depends on local tax law. Common examples include:
- Food and groceries: bread, vegetables, milk, fish, grain
- Health: prescription drugs, medical devices, sanitary products
- Children's items: children's clothing
- Agriculture: grain, wool, livestock
- Exports: goods and services sold to customers outside the taxing country
- Some services: certain education and transport services, depending on the country
Exports appear on nearly every country's zero-rated list. Governments zero-rate them to keep domestic goods and services competitive abroad, since adding tax would make them more expensive for international buyers.
Always check the local rules before you rely on a zero rate. A product zero-rated in one country can be standard-rated or exempt in the next.
Zero-rated vs exempt supplies
Both zero-rated and exempt supplies mean the customer pays no VAT or GST. The difference sits in what the supplier can reclaim.
A zero-rated supply is a taxable supply charged at 0%, so the supplier can still reclaim input tax on the costs of making it. An exempt supply falls outside the tax entirely, so the supplier cannot reclaim input tax on related costs.
That input tax difference has a real cash impact. A business making zero-rated supplies recovers the VAT it pays on its own purchases. A business making exempt supplies absorbs that VAT as a cost.
Terminology varies by country. Some regimes describe zero-rated supplies as "exempt with credit," and others call them exempt but grant a separate right to deduct. Read the local definition rather than the label.
Why are zero-rated supplies important?
Zero-rated supplies serve several important public policy goals:
- Economic Stimulus: By reducing the cost burden on certain goods and services, zero-rating can stimulate demand and economic activity in specific sectors. For example, zero-rating exports can enhance international competitiveness and encourage trade.
- Social Welfare: Zero-rating can be used as a policy tool to promote social welfare objectives. For instance, providing zero-rated supplies for healthcare and education can contribute to improving public health and literacy rates
- Administrative Simplicity: Since no VAT is collected on zero-rated supplies, there is less administrative burden on businesses and tax authorities. This is not the case for exempt supplies, which may require tracking and monitoring for compliance purposes.
Zero-rated supplies under GST
GST systems tend to define zero-rated supply more formally than some VAT regimes do. Countries including India, Australia, Singapore, Canada, and New Zealand all use the concept, most often for exports.
Under India's GST, "zero-rated supply" is a statutory term. It covers exports of goods and services and supplies to Special Economic Zones. Suppliers can either export under a bond or letter of undertaking without paying tax, or pay the tax and claim a refund.
The core principle holds across GST regimes: because a zero-rated supply is still a taxable supply, the supplier can claim input tax credits on the costs of making it. That is the practical line separating zero-rated supplies from exempt supplies, where no input credit is available.
Zero-rated supplies in the EU
Zero-rated supplies in the EU may include:
- Exports: Goods and services sold to customers located outside the EU are typically zero-rated for VAT purposes.
- Intra-EU supplies: Supplies of goods between EU member states can be zero-rated under certain conditions, such as when selling goods to another VAT-registered business in a different EU country.
- International transport: Services related to the transport of passengers or goods between countries, including air, sea, and rail transport, can be zero-rated.
- Certain foodstuffs and essentials: In some EU countries, specific food items, such as basic foodstuffs, water, and pharmaceutical products, may be subject to a zero VAT rate.
- Certain healthcare services: Some healthcare services, such as medical care, dental services, and certain medical equipment, may be zero-rated for VAT purposes.
It's essential to note that while these are common categories of zero-rated supplies in the EU, the specifics can vary from one EU member state to another. Therefore, businesses operating within the EU must familiarize themselves with the VAT regulations of each country where they conduct business to ensure compliance.
Does the concept of zero-rated supplies exist in sales tax?
No, not in the same way as a VAT/GST system.
Sales tax is a distinct consumption tax that exists mainly in the United States and some provinces of Canada. The tax is levied only on the final consumer, so there is no system of charging and deducting tax throughout the supply chain.
There are certain supplies that particular states will exempt from sales tax. These supplies are often similar to the types of supplies that are zero rated in other countries for VAT / GST purposes, for example food and medical products. However, because there is no concept of deduction of sales tax on purchases, the distinction between zero-rated supplies and exempt supplies is not applicable.
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