In the context of Value-Added Tax (“VAT”), there are two foundational concepts: zero-rated supplies and exempt supplies. These are often viewed as two sides of the same coin, but there is a crucial difference between the two. This article will clear up this misconception by identifying the main differences between these two categories of supplies. More importantly, we’ll explain why the distinction might be relevant to your business.

Taxable supplies: Standard-rated and zero-rated

Zero-rated supplies are regulated under section 11 of the Value-Added Tax Act 89 of 1991 (“the VAT Act”). Standard-rated and zero-rated supplies both constitute taxable supplies. The former is subject to tax at the standard rate of 15% (for now), while the latter is taxed at 0%.

In other words, the difference is the rate of tax that is applied – both are still subject to VAT. Examples of zero-rated supplies are exported goods, services rendered outside South Africa, gold coins, and even certain food products. There are various policy reasons and considerations behind levying VAT at 0% on these goods or services.

Exempt supplies

On the other hand, exempt supplies are regulated under section 12 of the VAT Act. These types of supplies do not constitute taxable supplies and are, therefore, not subject to VAT. Examples include transport services (road or rail), financial services (as defined by VAT Act), and certain supplies of educational services

What does this mean for your business?

You must register your business for Value Added Tax (VAT) if the total value of taxable goods or services is more than R1 million in a 12-month period, or is expected to exceed this amount… A business may also register voluntarily if the income earned in the past 12-month period exceeded R50 000. South African Government: Official information and services

As exempt supplies are not taxable supplies, they are not taken into account when determining whether or not a person meets the required threshold of taxable supplies sold to be liable for registering as a VAT vendor.

Thus, if a person only provides transport services, such as a taxi driver, they would not be able to register as a VAT vendor, as transport services are classified as an exempt supply. Furthermore, as the person supplying taxi services is not a vendor, they would be unable to claim any input tax.

However, if a person sells zero-rated supplies, such as the supply of milk, they would be able to register as a VAT vendor, as the supply of milk is a taxable supply. This means that the VAT vendor supplying milk could claim input tax on the goods and services acquired in order to supply the milk, for example the costs associated with packaging the milk.

It is essential to keep this distinction in the back of your mind when considering VAT in your business, as it determines when a person would be required to register for VAT and whether input tax can be claimed on the goods or services acquired.

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