Glossary
What are zero-rated and exempt sales?
Both mean the customer pays no tax. Only one of them lets you reclaim the tax on your own costs, and that difference can be worth a lot.
Updated
In short
A zero-rated sale is taxable at 0%, so you charge no tax but can still reclaim input tax; an exempt sale is outside the tax, and related input tax usually cannot be reclaimed. SimpleERP seeds zero-rated and exempt rates where your country has them.
A zero-rated sale is a taxable sale charged at 0%: the customer pays no tax, but the seller can still reclaim the input tax on costs used to make it. Exports are usually zero-rated. An exempt sale is outside the tax altogether, such as many financial or medical services in some countries, and the input tax on costs used to make it usually cannot be reclaimed.
Zero-rated and exempt sales: a worked example
Harbour Steel Furniture, a fictional business registered for tax at 20% and trading in US dollars, makes three sales in a month:
| Sale | Treatment | Tax charged | Input tax on related costs |
|---|---|---|---|
| Racks to a local shop, $5,000 | Standard rate 20% | $1,000 | Reclaimable |
| Racks exported to an overseas buyer, $8,000 | Zero-rated 0% | $0 | Reclaimable |
| A service your country exempts, $1,000 | Exempt | $0 | Usually not reclaimable |
Why does the difference matter to a small business?
A business with mostly zero-rated sales, such as an exporter, often reclaims more input tax than it charges and receives refunds. A business with mostly exempt sales carries the tax on its costs as an expense, which raises its prices or lowers its margin. Which treatment applies is set by law, not chosen.
In India, GST distinguishes zero-rated, nil-rated and exempt supplies: see zero-rated supply (India).
FAQ
Questions, answered
Is zero-rated the same as exempt?
No. Both charge the customer no tax, but a zero-rated sale is still a taxable sale, so input tax on related costs can be reclaimed. An exempt sale is outside the tax, so related input tax usually cannot be reclaimed.
Are exports zero-rated?
In most VAT and GST systems, exports of goods are zero-rated when you can prove the goods left the country, and many services to overseas customers are zero-rated or outside the scope. Keep export and shipping documents as evidence.
Do zero-rated sales count towards the registration threshold?
In most systems they do, because they are taxable sales. Exempt sales usually do not. Check your country's rule before deciding whether you must register.
How do I invoice a zero-rated sale in SimpleERP?
Pick the zero-rated rate on the line, or leave the tax off for an overseas customer. The invoice shows 0% tax, and the tax summary lists the sale under zero-rated so it appears in the right box of your return.
Related
Keep reading
Input tax
The VAT or GST paid on purchases, usually reclaimed against the tax charged on sales.
Read moreReverse charge
The buyer accounts for the tax on a purchase instead of the supplier, usually on services from abroad.
Read moreTax invoice format
The fields a VAT, GST or sales tax invoice usually carries, how the tax lines are worked out, numbering rules, and a worked invoice to check yours against.
Read more
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