What is a zero-rated supply?
Under [VAT](/glossary/value-added-tax-vat) systems, a zero-rated supply is still a taxable supply. The rate just happens to be 0%. This matters because businesses making zero-rated supplies can still recover the input VAT they pay on their costs.
Zero-rated vs exempt
- Zero-rated: 0% VAT charged; input VAT can be reclaimed; the sale counts toward VAT registration thresholds.
- Exempt: no VAT charged; input VAT generally cannot be reclaimed; the cost becomes part of the business's expenses.
This difference can significantly affect a business's costs and pricing.
Common examples
What's zero-rated depends on the country, but often includes:
- Exports of goods outside the country or trading bloc
- Certain basic food items
- Some medical and pharmaceutical products
- Books and educational materials (in some countries)
- International transport services
Example
An exporter sells $100,000 of goods abroad at 0% VAT. It paid $7,500 of input VAT on materials and services. Because exports are zero-rated, it charges no output VAT and claims a $7,500 refund. If the sales were exempt instead, it couldn't reclaim the $7,500.
Compliance tips
- Keep proof of export, such as shipping documents and customs declarations.
- Show zero-rated sales separately on VAT returns.
- Check the latest local VAT schedules, which change often.