Zero-Rated Goods

Zero-Rated Goods

What they are

Zero-rated goods are items taxed at a 0% value-added tax (VAT) rate. Although VAT is applicable to the supply, the rate charged to the final purchaser is 0%, so no VAT is added to the sale price. Governments typically designate essential or socially important items as zero-rated to reduce consumer costs and protect low-income households.

Key features:
* The sale is taxed at 0%, so consumers do not pay VAT on the purchase.
* Businesses can usually reclaim the VAT they paid on inputs used to produce or supply zero-rated goods (input VAT credit).
* The specific items designated as zero-rated vary by country and policy goals.

How zero-rating affects the economy

• Lowers the effective price of essential goods, easing cost-of-living pressures—especially for lower-income consumers.
• Reduces production costs for businesses that use zero-rated inputs, which can help keep supply chains efficient.
• Supports international trade because exports that are zero-rated avoid domestic VAT, lowering cross-border costs (other import duties or tariffs may still apply).
• Policy choices about which items to zero-rate have redistributive and fiscal implications for government revenue.

Zero-rated vs. exempt goods

Zero-rated: Taxed at 0% VAT; supplier charges no VAT to the buyer but can reclaim input VAT.
Exempt: Outside the VAT system; supplier does not charge VAT and generally cannot reclaim input VAT on costs related to exempt supplies.

Examples of typical exemptions (not exhaustive): certain financial and insurance services, some healthcare, social services, and education—treatments that are removed from VAT rather than charged at 0%.

Common examples of zero-rated goods

Items often designated zero-rated include:
* Basic food staples (bread, rice, pulses, vegetables)
* Prescription medications and some medical supplies
* Water and sewage services
* Books and printed educational materials
* Children’s clothing and diapers
* Equipment for people with disabilities
* Exported goods and certain charity shop sales

Note: Lists and definitions differ by jurisdiction; what is zero-rated in one country may be standard-rated or exempt in another.

Case study: policy response in South Africa

After a VAT rate increase, an independent panel recommended expanding South Africa’s list of zero-rated food items to protect low-income households. The expanded list included items such as white and brown bread, various flours, milk, eggs, rice, legumes, baby and adult diapers, sanitary products, and school uniforms. This illustrates how zero-rating can be used as a targeted tool to cushion vulnerable populations against tax-driven price increases.

Bottom line

Zero-rated goods are a VAT policy tool used to make essential items more affordable and to preserve supply-chain efficiency by allowing businesses to reclaim input VAT. Because designation varies across countries, policymakers choose zero-rating strategically to balance social protection, economic efficiency, and tax revenue considerations.