Zero-rated goods are products that are not subject to value added taxes mainly due to their societal importance or personal necessity. For VAT purposes, these goods are zero-rated and don’t have additional taxes levied on them. Some examples include groceries and goods sold by charities.Zero Rated are goods and services that basically are taxable, but the legislator decided to rate it at a “0” rate (for now). Whenever the government feels the need to collect more money, they can rate the zero rated goods or services at the rate they want. Exempt means that goods or services are not taxable.
KEY POINTS
=Zero-rated goods are products that are exempt from value-added taxation (VAT).
=Countries designate products as zero-rated because they are leading contributors to other manufactured goods and a significant component of a broader supply chain.
=Often, goods and services that are zero-rated are those that are considered necessary, such as food items, sanitary products, and animal feeds.
=Examples of zero-rated goods include certain foods and beverages, exported goods, equipment for the disabled, prescription medications, water, and sewage services.
In most countries, the government mandates a domestic VAT requirement for goods and services. In most reported data, the total price of products sold in a country includes the VAT and is an additional charge to sales tax in most transactions. The VAT is a form of consumption tax.
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, but when the consumer buys the final product, it includes a VAT.
International Dealings with Zero-Rated Goods
When a consumer brings a good from one country to another, either individually or via a shipment, there is generally an international VAT charge in addition to any import or export tariffs due. Internationally designated zero-rated goods are not subject to international VAT, so the cost of importing or exporting them 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 provided by a seller that is not subject to VAT.
Almost all goods are taxable unless specifically exempted. However, under the heading of ‘services’, only five services are subject to sales tax: advertisements on TV and radio, hotels and clubs, caterers, custom agents, and couriers. Sales tax in Pakistan, as defined by the Sales Tax Act, 1990 (STA 1990) is partially calculated under value added tax (VAT) and partially on the presumptive value addition basis. The presumptive value addition basis means that sales tax is levied on a presumed selling price defined by the Federal Board of Revenue (FBR). Previous exam questions have often involved the concepts of taxable supplies or services, exempt supplies, zero-rated supplies, and the apportionment of input tax between taxable and exempt supplies. Exempt supplies This term refers to supplies on which sales tax is not levied. The concept of exempt supplies is referred to in Section 13, whereby items listed in the Sixth Schedule of the STA 1990 are exempt, while any import, supply or class of taxpayer may be exempted through notification. It is important to understand that there are no exempt services. Zero-rated supplies This term applies to those supplies that are subject to 0% sales tax. The concept of zero-rated supplies is referred to in Section 4 of the STA 1990, and includes goods exported, goods specified in the Fifth Schedule, stores and consumption destined for outside Pakistan, goods supplied to a manufacturer of zero-rated items as notified by the FBR, or goods specified by the FBR. Input and output tax Input tax comprises tax levied on the supply or import of goods under STA 1990, federal excise duty levied on goods manufactured or produced, and on the provision for services under the sales tax mode, and the provincial sales tax on services apart from others during a tax period. It is important to note that an entity carrying out the business of zero-rated supply can claim input tax, but an entity carrying out the business of exempt supply cannot claim input tax.
A taxpayer is not allowed to claim the input tax relating to exempt supplies. Consequently, input tax needs to be apportioned between taxable and exempt supplies in accordance with following formula:
