What are 'Zero-rated Goods '?

In countries that use value-added tax (VAT), zero-rated goods are products that are exempt from VAT. Examples of goods that may be zero-rated include certain foods and beverages, exported goods, donated goods sold by charity shops, equipment for the disabled, prescription medications, water and sewage services, books and other printed publications and children's clothing.

BREAKING DOWN 'Zero-rated Goods '

Most countries have a domestic VAT mandated by the government, which is required for goods and services. VAT is included in the total price of goods sold in a country, and VAT is charged in addition to sales tax in most transactions.

Designation of Zero-rated Goods

Countries using VAT designate certain goods as zero-rated goods. Zero-rated goods are typically individualized items. Countries often designate goods as zero-rated because the goods are leading contributors to other manufactured goods and a significant component of a broader supply chain. Many food items are designated as zero-rated goods and are sold with 0% VAT.

In many cases, buyers use zero-rated goods in production and benefit from paying a lower price for the goods without the tax. A food manufacturer may use zero-rated goods in the manufacturing of a food product. When the final product is sold to the buyer or consumer, the manufactured goods include a VAT that is less if zero-rated goods have been included in production.

Overall, the absence of VAT on zero-rated goods results in a lower total purchase price for the goods. Zero-rated goods can save buyers a significant amount of money. In the United Kingdom, for example, the standard VAT rate levied on most goods is 17.5%, and the reduced rate is 5%.

International Dealings with Zero-rated Goods

Most zero-rated goods do not require the payment of international VAT. International VAT is required for most goods in addition to import or export tariffs. International VAT is charged when a consumer brings a good from one country to another, either individually or from a shipment. Internationally designated zero-rated goods are not subject to international VAT, so the cost of transporting them internationally is lower.

Exempt Goods

Some goods and services are also reported as exempt from VAT. These exempt goods and services are typically a focused group of goods and services provided by a seller that is not subject to VAT. The European Commission, for example, exempts goods such as finance and insurance services and some land building supplies. Other examples of exempt goods are those that serve the public interest such as medical and dental care, social services, and education.

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