Zero-Rated vs Exempt Supplies in South Africa: What's the Difference?

The difference in one table

The row that matters most is the third one. On the client's side, the two look the same: they pay no VAT. The difference shows up in your own books.

Why the input tax difference matters

Take two businesses that each spend R11,500 a month on costs, R1,500 of which is VAT. One exports everything it makes. The other runs a crèche.

The exporter charges VAT at 0% on its sales, so it pays nothing over to SARS on them, and it still claims back the R1,500. A business that mostly makes zero-rated sales can end up with more VAT to claim than to pay, which means a refund. The crèche doesn't charge VAT either, but childcare is exempt, so it can't claim the R1,500 back. For the crèche, that VAT is simply part of its costs.

Registering won't fix that. A business that only makes exempt supplies isn't carrying on an "enterprise" for VAT purposes, so it can't register, however much it earns. SARS's VAT 404 guide uses this exact case: a crèche earning R1.44 million a year still can't register.

Common zero-rated supplies

A zero rate has to be backed by documentary proof that SARS accepts, such as export documents. SARS's examples include:

• Goods exported from South Africa, and international transport of goods or passengers
• Services physically performed outside South Africa, and some services to non-residents who aren't in the country, with exclusions such as services connected to land here
• Certain basic foods: brown bread, brown bread flour, maize meal, samp, dried mealies, mealie rice, rice, dried beans, lentils, edible legumes and pulses, tinned pilchards, fresh fruit and vegetables, vegetable cooking oil (not olive oil), milk, cultured milk, milk powder, dairy powder blend and hens' eggs
• Petrol and diesel, which carry the fuel levy instead, and marked illuminating paraffin
• The sale of a business as a going concern, when both sides are vendors and every condition is met
• Municipal property rates, when they're billed separately from other municipal charges
• Some farming inputs, such as fertiliser, seed and animal feed, bought by a registered farmer who shows the supplier a Notice of Registration that allows it. VAT 404 says this concession will end on a date still to be announced

The food list is narrower than it looks. White bread is standard-rated. So are zero-rated foods once they're prepared to eat or packed with something standard-rated: a sandwich, a glass of milk in a restaurant, rice with a sachet of flavouring. The exact wording is in Schedule 2 to the VAT Act, and the list has changed over the years, so check it before you rely on a product being zero-rated.

Common exempt supplies

• Financial services, such as interest on a loan, life insurance, and the services of medical schemes and pension funds. Fees and commissions are still standard-rated
• Renting out a home (a "dwelling") for someone to live in. Holiday and other commercial accommodation is taxable
• Passenger transport by taxi, bus or train within South Africa. Domestic flights are standard-rated
• Education at registered schools, colleges and universities, and certain courses run by approved public benefit organisations
• Crèches and after-school care
• Donated goods sold by non-profit organisations
• Services that bodies corporate, share block companies, homeowners' associations and similar bodies supply to their members, paid for out of levies

Exempt isn't the same as out of scope, although neither lets you claim input tax. Selling a private asset that was never part of your business isn't exempt. It's simply outside the VAT system.

If you make both kinds of supply

Plenty of businesses do. Take a VAT-registered landlord who rents out shops and flats. The shop rent is standard-rated, because commercial property is taxable, and the flat rent is exempt. VAT on costs that relate only to the shops can be claimed in full. VAT on costs that relate only to the flats can't be claimed. VAT on shared costs, such as the bookkeeper who does both, has to be split using an apportionment method SARS approves.

Apportionment is where mixed businesses most often go wrong, so it's worth having a registered tax practitioner check your first few returns.

How to invoice each one

A zero-rated supply needs a full tax invoice, even below R5,000, with the VAT shown at 0% rather than left off. It's also one of the few cases where SARS lets a tax invoice be in a foreign currency, which matters for exports. Keep the proof that justifies the zero rate with your copy of the invoice.

An exempt supply has no VAT to show. If one invoice mixes items that are treated differently, VAT 404 says it must clearly separate them and show the value, and the VAT if any, for each. The full field list for a tax invoice is in our SARS tax invoice checklist.

On your VAT201, zero-rated and exempt sales go in their own fields, apart from your standard-rated sales. Our VAT201 guide walks through the return. If you aren't VAT registered, none of this applies to your sales, because you don't charge VAT at all. Our guide to invoicing when you're not VAT registered covers that case.

Doing this in Invo

Once VAT is switched on in your settings, every invoice line has a VAT treatment: Standard, Zero-rated or Exempt. Invo charges 15% only on the standard lines and keeps the three totals apart, and the VAT report (Solo plan and up) sets them out by VAT201 field so you can copy them across. Expenses record the VAT you can claim back. See VAT and reports, or compare plans on the pricing page.

Questions people ask