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.

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Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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