In South Africa, the Value-Added Tax (VAT) system is designed to tax the consumption of goods and services. While the standard VAT rate is 15%, certain goods and services are classified as zero-rated, meaning they are taxable but subject to a 0% VAT rate. This classification aims to alleviate the tax burden on essential items and promote economic activities like exports. Understanding zero-rated supplies is crucial for businesses and consumers to ensure compliance and benefit from potential tax reliefs.
What Are Zero-Rated Supplies?
Zero-rated supplies refer to specific goods and services that, while taxable under the VAT Act, are taxed at a 0% rate. Vendors supplying these goods can claim input tax credits for VAT paid on purchases related to these supplies, effectively reducing their tax liability. This mechanism ensures that the final consumer does not bear the VAT cost on essential goods and services.
Categories of Zero-Rated Supplies in South Africa
The South African VAT Act outlines various categories of zero-rated supplies:
1. Basic Foodstuffs
To make essential food items more affordable, certain basic foodstuffs are zero-rated. These include:
Brown Bread: A staple in many households, brown bread is zero-rated to support basic nutrition.
Maize Meal: A primary source of carbohydrates, especially in many South African communities.
Rice: Widely consumed across diverse cultures in the country.
Lentils and Dried Beans: Affordable protein sources for many families.
Fresh Vegetables and Fruits: Encouraging healthy eating by making produce more accessible.
Milk and Eggs: Essential animal protein and calcium sources.
Example: A local grocer sells a variety of fresh produce, including spinach, tomatoes, and apples. These items are zero-rated, allowing the grocer to claim input VAT on expenses like seeds and fertilizers, thereby keeping prices lower for consumers.
2. Exported Goods and Services
South Africa employs a destination-based VAT system, meaning goods and services consumed outside the country are zero-rated.
Direct Exports: Goods shipped directly to an address outside South Africa.
Services Rendered to Non-Residents: Services provided to non-residents, such as consultancy services, where the benefit is enjoyed outside South Africa.
Example: A South African machinery manufacturer exports equipment to a client in Botswana. The sale is zero-rated, allowing the manufacturer to reclaim VAT on production inputs, making their products more competitive internationally.
3. Fuel Levy Goods
Certain fuels are subject to specific levies and are zero-rated for VAT purposes:
Petrol and Diesel: These fuels are subject to the fuel levy and are zero-rated to avoid double taxation.
Illuminating Paraffin: Used primarily for heating and lighting, making it essential for many low-income households.
Example: A fishing company purchases diesel for its boats. Since diesel is zero-rated, the company can claim input VAT on maintenance supplies, reducing operational costs.
4. Farming Inputs
To support the agricultural sector, specific farming inputs are zero-rated:
Animal Feed: Including feed for livestock and poultry.
Seeds and Plants: Used for cultivation to produce food crops.
Fertilizers and Pesticides: Essential for crop protection and yield enhancement.
Example: A maize farmer purchases seeds and fertilizers for the upcoming planting season. These inputs are zero-rated, allowing the farmer to claim input VAT on other farming equipment, thereby lowering production costs.
5. International Transport Services
Services involving the international transport of goods and passengers are zero-rated:
Airline Tickets for International Flights: Encouraging tourism and business travel.
Shipping Services: Transporting goods to and from international destinations.
Example: A logistics company ships South African wine to Europe. The shipping service is zero-rated, allowing the company to claim input VAT on expenses like packaging and warehousing.
6. Sale of a Going Concern
When a business is sold as a going concern, the transaction can be zero-rated if specific conditions are met:
Both Parties Must Be VAT Registered: Ensuring compliance and proper record-keeping.
The Business Must Be an Income-Earning Activity on the Date of Transfer: Confirming the continuity of operations.
Example: A restaurateur sells their fully operational establishment to another VAT-registered entrepreneur. The sale includes all assets and liabilities, and both parties agree in writing that the business is sold as a going concern. This transaction qualifies for zero-rating, allowing the seller to avoid charging VAT on the sale price.
Importance of Proper Documentation
Applying the zero rate requires meticulous record-keeping:
Tax Invoices: Detailed invoices showing the nature of goods or services supplied.
Proof of Export: For goods exported, documentation like bills of lading or customs declarations is essential.
Contracts and Agreements: Especially for sales of going concerns, written agreements outlining the terms are necessary.
Example: An exporter ships goods to an overseas client. To apply the zero rate, they retain the bill of lading, customs export documents, and a copy of the sales contract, ensuring compliance during a SARS audit.
Distinguishing Between Zero-Rated and Exempt Supplies
It's vital to differentiate between zero-rated and exempt supplies:
Zero-Rated Supplies: Taxable at 0%, allowing vendors to claim input VAT credits.
Exempt Supplies: Not subject to VAT
Zero rated VAT items – Know them well and get it right with SARS.
The definition of Zero Rated items are supplies of goods or services specified in the Vat Act that can be billed at 0% VAT. This means no additional amount of VAT will be added to the purchase price of zero-rated supplies and services.
The VAT Act, specifies sixteen Zero Rated VAT items and it’s important to know so you can get it right with SARS, and avoid penalties or difficult questions if you get audited.Obviously, a great bookkeeper and accountant will know these well and keep you out of trouble.
Herewith the 16 Zero Rated VAT items allowable by the VAT Act.
- Direct exports;
- Disposing of an enterprise or part of it as a going concern;
- Certain specified foodstuffs;
- Petrol or distillate fuel oil subject to fuel levy;
- The supply of illuminating kerosene (paraffin);
- The supply of certain goods for farming purposes;
- The sale of gold to the South African Reserve Bank, South African Mint and other registered banks;
- The supply of gold coins by the South African Mint, but not gold coins set into jewellery;
- The supply of goods to a branch or main business in an export country;
- Supplies to the Industrial Development Zones (where the direct export rules apply);
- Conversion of old order mineral rights;
- Income of foreign donor-funded projects;
- Supply of goods by a vendor to a non-resident where that vendor delivers the goods in South Africa;
- Compensation received from a public authority in terms of Section 19 of the Animal Diseases Act, 1984 to supply a ‘controlled animal or thing’ as defined in that Act to a public authority;
- Land reform and land restitution transactions; and
- Goods sold from a duty-free shop.
Its a good idea to share this article with your bookkeeper and accountant if your business frequently has transactions with zero rated VAT items. This is another step towards accounting excellence – completeness, accuracy, and validity.