VAT Exempt Meaning & List of Zero-Rated VAT Items South Africa

VAT is levied on the value added to goods and services by the tax department of South Africa to generate money for the government. The majority of the people argue that the VAT is levied on the value added to all the foods and services in the country, but as a matter of fact, some commodities are free from the VAT.

The commodities free from the value-added tax are known as VAT-exempted items and services. On the other hand, there is another similar concept known as zero-rated VAT to ease the taxpayers. To understand the basics of VAT exemption and zero-rated VAT, we need to consider various factors and analyze them, so come with me to see the details.

Understanding VAT and VAT Exemption

VAT is the tax added to the goods and services. The majority of people think that only individuals in the market pay VAT. However, VAT is charged at every stage from raw material to the distribution of the goods to the retailers.

Let’s say, an individual owns a soap manufacturing company that supplies 1 million soap packets per day. The company requires raw materials to manufacture soap which is available in the market. When a company purchases raw materials, it pays tax and then manufactures soaps.

Manufacturing does not meet the criteria of VAT; therefore, a company doesn’t pay tax at this stage. However, when the soaps are manufactured, the company pays a heavy amount of tax on distributing soaps to retailers or consumers.

Why is Manufacturing Free from VAT?

People often think that manufacturing qualifies eligibility criteria of VAT, but one does not need to pay tax at the manufacturing stage of goods. Basically, VAT is on the consumption of goods and services, whereas manufacturing is a process of production. Since production is free from VAT, the government cannot impose value-added tax on people.

What Does VAT Exemption Mean?

As we have discussed how a company is responsible for paying the tax to the government. Similarly, small businesses of the country also pay VAT on consuming goods and services but some people argue that VAT can create chaos in the money flow cycle of the country.

To avoid such problems, governments allow people to run companies or provide services without adding value to goods and services. The commodities free from paying tax are known as VAT-exempted items. Consumers do not need to pay tax on VAT-exempted goods or services and that’s why these items are inexpensive.

Essence of VAT Exempt

The goods free from the VAT are affordable to the public. If the government imposes VAT on the daily use commodities and generates a heavy amount of rands, it can cause an economic crisis for the country. However, the VAT exemption concept does not exist in some countries, including the USA and UAE, but these economies have acquired various approaches to collect tax on goods and services.

Why is the VAT Exempt Significant for South Africa?

A group of experts argue that if the South African government demolishes VAT, it can help industries grow and control inflation. Another group of experts argue that if VAT is demolished, it can create a number of problems, including slow circulation of money and the government’s control over the economy may weaken.

To eliminate economic issues and money flow problems as well as to control inflation and the economy, the government has found a way to impose taxes. Neither does it impose VAT on all the commodities nor it liberates all the goods and services from VAT. Instead, the government frees a few commodities from VAT and imposes it on the other types of goods and services.

In this way, the economy is safe from suffering chronic issues of inflation and slow money flow as well as the government’s grip of control over the economy strengthens. Inflation is balanced and money flow is accelerated day by day and as a result, the economy grows.

Examples of VAT-Exempt Commodities

There is a list of items exempt from VAT by the government and the tax department. The majority of the items in the list of VAT-exempt are the basic necessities. Some people confuse the items added to the list of VAT-exempt with zero-rated VAT items but both are different.

• Financial Services: The majority of the financial services are free from VAT, including credit card insurance as well as pensions.
• Residential Accommodation: If an individual rents his property, the income generated from the renting is VAT-exempted.
• Medical and Healthcare Services: A number of medicines and medical treatments, including certain surgeries, consultations, and operations are VAT-exempted.
• Education Services: Schools, colleges, and universities do not pay VAT nor do the textbook publishers, distributors, and retailers pay value-added tax.
• Public Transport Services: Public transportation, including trams, trains, and buses is free from VAT.

Why Does Not the Government of South Africa Impose VAT on Basic Commodities?

People frequently ask the reason behind the government not imposing tax on the basic necessities. Some experts claim that if the government imposes tax on basic commodities, it can generate trillions of rands within a short period because basic necessities are consumed more compared to others.

But if the government imposes VAT on basic commodities, it can not only create problems for manufacturers but also for consumers. For example, if R10 of raw material price suddenly increases to 15 rands, it may trigger a chain reaction, and as a result, the price of all the commodities relevant to the raw material may increase. In the end, the country may experience an extreme economic crisis.

Benefits of VAT-Exemption

As we know without VAT, inflation can rise in our country, as well as other chronic economic problems may occur if VAT is not exempted. But it is not the only reason why VAT is beneficial for the people of South Africa, there are several other reasons. Let’s discuss them one by one.

Affordability

More than half of the individuals in our country are unemployed and the rest of them have financial issues. Only a class of a few thousand people are part of the elite who enjoy financial freedom. A rough estimate suggests that 85% to 90% of people are unable to afford basic commodities because they have low earnings.

In such conditions, a large number of people are unable to get basic facilities, such as medical treatment, transportation, education, and daily-use commodities. In order to provide facilities to all the citizens of South Africa, VAT is exempted to decrease the cost of goods and services, hence a group of certain goods or services is made affordable for low-earning citizens.

Balancing Revenue

Another major reason for imposing VAT is to balance revenue generated by the government. If the government collects more revenue than required, it can benefit the government but also negatively affect the market value of commodities. Additionally, it is a way to promote social welfare in society by providing basic necessities to all the citizens of the country.

2. Understanding Zero-rated VAT

Zero-rated VAT is a facility for sellers who pay hundreds of rands to purchase goods from industries. VAT exemption is similar to zero-rated VAT, but in the first one government does not impose VAT and in the latter one government imposes 0% VAT. You may find it hard to understand the difference between no VAT and 0% VAT.

Basically, a business does not need to pay tax on the goods when it comes it selling. However, the business is responsible for paying taxes when it comes to purchasing goods and at the end of the terms, a business owner can claim it. Actually, the tax department cuts the cost of the overall tax when you reclaim it by submitting the tax reports.

How Does Zero-Rated VAT Work?

Let’s say subject A is selling vegetables for 400 rands and the VAT rate is 0%. Subject A has purchased vegetables from the market for 300 rands plus 50 rands in VAT, he pays a total of 350 rands to the industry. When it comes to the VAT returns, he can claim the 50 rands he paid to the industry.

Examples of Zero-Rated VAT Items

The list of zero-rated VAT items is not so long but all of the items in it are basic commodities. According to a recent report from the tax department of South Africa, the zero-rated food items are 19. Here is a list of all the zero-rated VAT items below.

Category	Description
Exports of goods and services	If a South African vendor is responsible for delivering, exports of goods and services are zero-rated VAT.
Illuminating paraffin	Petrol and diesel used as illuminated paraffin are zero-rated VAT.
International transport services	Both air and sea transportation are zero-rated VAT when a South African vendor provides international transportation services
Farming inputs	Farming inputs, including feed, fertilizer, pesticides, and farming equipment are zero-rated VAT.
Goods subject to the fuel levy	Petrol and diesel related to the goods are zero-rated VAT.
Residential rental accommodation	The rented property is zero-rated VAT.
Educational services	Education services, such as tuition fees, are zero-rated VAT.
Certain grants by the government	Some grants are zero-rated VAT. However, the names or grants are unavailable.
Sales of going concerns	Both the seller and the buyer are free to sell or purchase the property if they are registered as South African vendors.

In this table, you can see the categories and the description. All the categories, including farming inputs, educational section, and public transportation are available. Two major categories medical, healthcare services, and food items, are not part of the table.

List of the Zero-Rated VAT Food Items

1. Maize meal
2. Samp
3. Brown bread
4. Dried mealies
5. Mealie rice
6. Lentils
7. Dried beans
8. Pilchards
9. Milk powder
10. Dairy powder blend
11. Brown wheaten meal
12. Vegetables
13. Rice
14. Fruit
15. Milk
16. Cultured milk
17. Vegetable oil
18. Eggs
19. Edible legumes and pulses of leguminous plants

Medical Services Zero-Rated VAT

The table excludes because there is a long list of the services and goods with zero-rated VAT. For example, the services provided by doctors at private clinics are zero-rated VAT; additionally, the inputs, equipment, and medical transportation services, such as ambulances are zero-rated VAT.

Benefits of Zero-Rated VAT

1. Relief for citizens: Zero-rated VAT is a way to cut off the additional cost imposed by the government. If the price of a commodity is down, it can positively affect the inflation ratio.
2. Flow of money: Another purpose of the zero-rated VAT is to balance the flow of money and encourage people to engage in sale and purchase activities.
3. Accessibility: The majority of the citizens of South Africa are unable to access necessities such as petrol, food, and education but zero-rated VAT enables them to access these basic necessities effortlessly.

The purpose of value-added tax is to generate revenue and then the money is spent on the education and the health departments built for people. Value-added tax seems similar to income tax but it is completely different and its rate is 15%, whereas the income tax rate depends upon income brackets. If the government does not impose a value-added tax, it is called a VAT exemption.

On the other hand, zero-rated VAT is different as the government imposes a 0% tax on the daily use commodities and services provided by governmental and private institutes, such as education section, medical services, food items, or transportation services. I have provided a list of the zero-rated VAT as well as there are examples of VAT-exempt goods and services above in the VAT-exempt section.

I hope this information will help you in the future, thank you.