What is the Difference Between Exempt and Zero Rated (VAT)?

The main difference between exempt and zero-rated goods in the context of Value Added Tax (VAT) lies in the treatment of input tax and the impact on businesses and consumers. Here are the key differences:

1. Input Tax Recovery: Zero-rated goods are subject to a 0% VAT rate, and producers can claim a credit for the VAT paid on inputs. On the other hand, exempt goods are not taxed, but producers cannot claim a credit for the VAT paid on inputs.
2. Impact on Businesses: Zero-rated VAT can improve a business's cash flow and competitiveness by reducing their tax costs, while exempt supplies do not enable VAT reclaims, which can result in additional irrecoverable costs for businesses.
3. Impact on Consumers: Zero-rated goods or services are generally cheaper for consumers, as businesses can claim back any input tax they have paid. In contrast, businesses selling exempt goods or services may have higher costs, as they cannot claim back any input tax, and may pass this cost onto their customers.
4. Taxable Turnover: Zero-rated supplies are subject to VAT at a 0% rate, while exempt supplies are not incorporated into the taxable turnover and are not subject to VAT at all.

In summary, zero-rated and exempt goods have different implications for businesses and consumers, particularly in the context of reclaiming input VAT. Understanding these distinctions is crucial for businesses to comply with VAT regulations effectively.

Comparative Table: Exempt vs Zero Rated (VAT)

Here is a table highlighting the differences between exempt and zero-rated VAT:

In summary, both exempt and zero-rated VAT goods and services do not have VAT charged on them. However, the key difference lies in the input tax recovery. Businesses can recover input tax on supplies used to make zero-rated supplies, but they cannot reclaim VAT incurred on inputs used to produce exempt supplies.