posted on 06-06-2019

Zero-Rated Goods

Updated October 1, 2019

What are Zero-Rated Goods?

Zero-rated goods are goods that aren't subject to value-added (VAT) tax.

How Zero-Rated Goods Work

A value added tax (VAT) is a consumption tax added to a product's sales price. It represents a tax on the "value added" to the product throughout its production process.

The VAT system is invoice-based. Each seller in the product chain includes a VAT charge on the buyer's invoice. Under a VAT taxation system, all sellers collect the tax and then pay it to the government. The VAT gives sellers along the supply chain a direct economic motivation to collect the tax, thereby reducing the incidence of tax evasion.

Food, medicine, water, certain services, and clothing are often zero-rated goods. However, VAT taxes are usually part of the price of a good (as opposed to a sales tax, which is added to the price of a good), so some consumers may not be aware of which products are zero-rated.

Why Zero-Rated Goods Matter

The VAT is a highly efficient flat consumption tax that reduces the incidence of non-compliance. More than 100 countries have adopted it -- with rates ranging from 10% - 25%. Accordingly, buying zero-rated goods can save consumers a large amount of money.