13 Apr 2016

Difference Between Zero Rated and Exempted VAT

VAT refers to value added tax which is levied on the sale of different types of good and services. The prices of all these goods and services include VAT’s value. There are various types of VAT rates which are applicable to different types of goods & services. However, there are specific goods and services on which VAT cannot be charged. Retailers, therefore, need to know what tax rates are applicable for various goods and services to ensure that the correct amount of tax is collected. In this blog, we clearly explain the various types of goods and services, tax rates which are applicable which apply and show the differences between zero classified products and exempt goods-

Zero Rated

Products which have a zero value are products on which value-added tax (VAT) isn’t imposed. Products which have a zero rating can include certain types of food items, trading pure gold, silver and platinum, medical equipment, trading authentic gems and pearls, etc. Resellers who sell zero-rate goods can recover their VAT on costs which are incurred on any purchases which are directly linked to the sale of zero-rated products. Once the reseller fills the VAT returns, they can claim input tax credits for recovering the VAT they paid or owe to that business. For instance, most food is zero-rated. Therefore, you won’t have to pay for the government. However, you might be charged VAT on the tubs you bought for storing food, for which you can recover VAT.


Exempt products are also called non-VAT goods. As VAT isn’t charged on exempt products, a supplier offers exempt products cannot claim VAT on purchases related to exempt products. The perfect examples of exempt products like insurance, specific types of training and education, specific services provided by doctors and dentists, postal services, physical education, cultures services, etc.

If a reseller only offers exempt goods or services, they can’t register or charge VAT. Therefore, no VAT can be claimed pack. In case the resellers sell exempt good and a number of taxable items, they will be exempted partially since they can claim VAT on the taxable goods and services which they have sold. This includes all items which the government may decide to exempt like for instance, stamps and insurance. In case you buy exempt supplies, you cannot claim VAT since there is none you can claim back from. In case you supply only exempt goods, you won’t need to register for VAT.

What Is the Difference Between the Two?

Zero-rated & exempted products are similar since they don’t incur VAT on goods and services sold. The major difference between both of these is not from the buyer’s point of view but rather from the seller’s point of view. Resellers who sell zero-rated products can claim VAT on any acquisitions which are directly related to the sale of zero-rated goods. In contrast, exempt product resellers can’t claim VAT on purchases linked to exempt products.

Exempt Supplies

Exempt supplies are not a part of the VAT regime and are not a rate of tax. So, if you incur exempt supplies, you won’t be able to register for VAT. Neither will you be able to recover any VAT on costs credited on creating exempt supplies. In case you have taxable as well as exempt supplies, you are eligible to register for VAT. However, you won’t be able to recover the entire VAT on your costs.

What is the confusion all about?

One common trap which most businesses fall into during VAT filing is that they usually make zero-rated taxable supplies. However, they change their mind, often because of economic circumstances and end up creating exempt supplies without considering the consequence on VAT recovery.

Advisable Tips for Businesses

Consult one of the top UAE VAT experts to ensure that you are aware of the difference between exempt and zero-rated supplies and the impacts they may have in your ability to recover VAT on your costs. If you are planning to exempt supplies, you will have to factor in extra costs of lost VAT before you begin, or else you could meet with a horrid surprise. If you focus on exempt as well as taxable supplies, you will be partially exempt. Each quarter, you will need to calculate to find out how much VAT you may recover.

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