Zero-Rated, Exempt & Deemed Supplies

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Zero-rated supply

– refers to items that are taxable, but the rate of tax is nil on
their input supplies. The government doesn’t tax its retail sale but allows credits for the value-added tax (VAT) paid on inputs. This reduces the price of a good.

Governments commonly use zero-rated goods to lower the tax burden on low-income households by zero-rating essential goods.

NB in South Africa we also have goods that zero-rated because the goods are leading contributors to other manufactured goods and thus a leading part of a broader supply chain. Many food items are designated as zero-rated goods; these food items are sold with a 0% value-added tax.

Examples of Zero-Rated Goods;

• Exports
• 19 basic food items (brown bread, dried mealies, dried beans, lentils, pilchards or sardinella in tins or cans, rice, fresh fruit and vegetables, vegetable oil, milk, eggs
• Illuminating paraffin
• Goods which are subject to the fuel levy (petrol and diesel)
• International transport services
• Farming inputs
• Sales of going concerns, and
• Certain grants by Government

Exempt Supplies

– Some goods and services are exempt from VAT. If all of the goods and services you sell are exempt, your business is exempt, and you won’t be able to register for VAT. This means you can’t reclaim any VAT on your business purchases or expenses.

Examples of Exempt Supplies;

  • Insurance, finance and credit
  • education and training
  • fund raising events by charities
  • subscriptions to membership organisations
  • selling, leasing and letting of commercial land and buildings – this exemption can be waived These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes. And if you buy exempt items, there is no VAT to reclaim.

NB:

Exempt items are different from zero-rated supplies. In both cases VAT is not added to the selling price, but zero-rated goods or services are taxable for VAT – at 0%.
If you only sell or otherwise supply goods or services that are exempt from VAT then your Business is an exempt business and:

  • you cannot register for VAT,
  •  you cannot recover any VAT you incur on your purchases or expenses.

This is in contrast to where you sell or otherwise supply zero-rated goods or services. Here you can reclaim the VAT on any purchases that relate to those sales. If you sell mainly or only zero-rated items, you can apply for an exemption from VAT registration. If you are exempted from registration you will not be able to reclaim any VAT.

Deemed Supplies

– is a transaction or event on which you have to pay output tax, even if you haven’t actually sold any goods or services. The transaction or event is regarded as a taxable supply.

Example of Deemed Supplies;

Any goods or services you take from your business for your own use;

  • Sale in execution of a vendor’s goods (e.g. to settle debt);
  • Goods sold according to the lay-by system are deemed to be supplied at the time the buyer pays for them in full.
  • Certain payments public authorities and municipalities make to designated entities;
  • Certain fringe benefits that you provide your staff (except housing).
  • If you retain assets from your business at the time you deregister as a VAT vendor, SARS will regard this as a deemed supply and will expect you to pay VAT of 14% on the lower of the cost or the current value of those assets.
  •  Short-term insurance claims paid to your business. For example, if you receive an insurance pay-out for a claim for damaged stock, this pay-out is a deemed supply and you’ll have to pay VAT at the standard rate on the value of the pay-out.
  • Rights to use goods (the right is a supply)
  • Local supplies made by agents representing foreign importers.
  • Expropriation of fixed property where it forms part of the enterprise’s assets;
  • Housing subsidy scheme payments received.
  • Goods that you temporarily remove from Customs Controlled Areas and don’t return within 30 days;
  • Company formation, amalgamations, intra group transactions and liquidation distributions. Please note that this isn’t deemed a supply if SARS approves the scheme for income tax purposes.
  •  Services you supply a foreign warrantor under a warranty agreement

For more vital VAT info, stay tuned to the blog or contact us for more info.