Value-added tax (VAT) is one of South Africa’s most significant indirect taxes, affecting businesses and consumers alike. However, while most people know that the standard VAT rate is 15%, fewer understand that not all goods and services are treated the same for VAT purposes.
The Value-Added Tax Act 89 of 1991 (as amended) divides supplies into three main categories: standard-rated, zero-rated, and exempt supplies. Understanding the difference is essential for business owners in particular, as it affects pricing, compliance, and the ability to claim input VAT back from SARS.
Standard-Rated Supplies
These are the most common type of taxable supply, being goods and services that attract VAT at the current rate of 15%.
Examples of standard-rated supplies include:
- Clothing and footwear
- Furniture and household appliances
- Motor vehicles (in the case of a motor vehicle dealer)
- Restaurant meals
- Professional services such as legal and accounting fees
- Most building materials and construction services
For example, if a furniture retailer sells a dining table for R11,500, this price includes VAT of R1,500. The retailer collects the VAT on behalf of SARS and can usually claim back VAT paid on qualifying business expenses, such as inventory purchases, shop fittings, and office supplies.
Standard-rated supplies therefore allow VAT vendors to recover the VAT incurred in running their businesses (subject to certain specified exclusions), provided that the expenses relate to making taxable supplies.
Zero-Rated Supplies
Zero-rated supplies are also taxable supplies, but VAT is charged at 0% instead of 15%. Although no VAT is added to the selling price, these supplies remain ‘taxable’ under the VAT Act.
A common mistake is to assume that zero-rated supplies and exempt supplies are one and the same. However, the distinction is important, because businesses making zero-rated supplies may still claim input VAT on qualifying purchases and expenses. This is not the case with exempt supplies.
Zero-rating is primarily intended to reduce the tax burden on essential goods, and encourage certain economic activities (such as exports).
Examples of zero-rated supplies include:
- Brown bread
- Maize meal
- Rice
- Fresh fruit and vegetables
- Milk
- Vegetable oil
- Eggs
- Dried beans
- Exports that meet the prescribed VAT requirements
Consider a supermarket selling a loaf of brown bread. No VAT is added to the selling price because the product is zero-rated. However, the supermarket can still recover the VAT it paid on business costs such as shelving, refrigeration equipment, cleaning supplies, and delivery vehicles.
This makes zero-rated supplies particularly beneficial because consumers pay no VAT, while businesses are generally not disadvantaged by unrecoverable VAT costs.
Exempt Supplies
Exempt supplies differ fundamentally from zero-rated supplies. No VAT is charged on exempt supplies, but businesses making exempt supplies generally cannot claim input VAT on expenses incurred in providing those supplies.
This inability to recover input VAT can increase operating costs, as VAT paid on purchases effectively becomes an expense of the business.
Common examples of exempt supplies include:
- Financial services such as granting loans and certain banking services
- Residential accommodation in a dwelling
- Public road and rail transport
- Educational services provided by qualifying institutions
- Childcare services provided by qualifying crèches
For example, a landlord renting out a residential property does not charge VAT on the rental income. However, the landlord also cannot claim back VAT paid on repairs, maintenance, or improvements to the property, assuming that the rental activity consists solely of exempt supplies.
In contrast, the letting of commercial or industrial property by a registered VAT vendor is a taxable supply, subject to VAT at the standard rate. However, any input VAT paid on related property costs can be claimed back from SARS.
Why the Distinction Matters
Understanding the difference between these three categories is crucial, because it directly affects a business’s cash flow and VAT compliance.
Businesses making standard-rated and zero-rated supplies generally have the right to claim input VAT on qualifying business expenses. Those making only exempt supplies usually cannot recover input VAT, which increases the effective cost of doing business.
Some businesses make both taxable and exempt supplies. These businesses may therefore need to apportion their input VAT, claiming only the portion that relates to taxable activities. This calculation can be complex, often requiring careful record-keeping and compliance with SARS guidelines.
Failure to classify supplies correctly can lead to costly errors. Charging VAT when none is due may make products unnecessarily expensive, while failing to charge VAT on standard-rated supplies could result in penalties, interest, and additional assessments from SARS.
The Bottom Line
Although the terms ‘zero-rated’ and ‘exempt’ are often used interchangeably in everyday conversation, they have very different meanings under the VAT Act.
- Standard-rated supplies attract VAT at 15%, with businesses generally entitled to claim input VAT.
- Zero-rated supplies are taxed at 0%, allowing businesses to continue claiming input VAT while reducing the tax burden on consumers.
- Exempt supplies carry no VAT but usually prevent businesses from recovering VAT on related expenses.
For businesses, correctly identifying the VAT status of every product and service is essential for accurate pricing, sound financial management, and compliance with SARS’ requirements.
When uncertainty exists, obtaining professional tax advice is often far less expensive than correcting a VAT error after a SARS audit.
WRITTEN BY STEVEN JONES
Steven Jones is a retired tax practitioner and member of the South African Institute of Professional Accountants.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.