Zero-rated vs exempt supplies: what is the difference

The short version

A zero-rated supply is a taxable supply, it is just taxed at 0% instead of 15%. Because it is still a taxable supply, it still counts toward the R1 million compulsory VAT registration threshold, and a VAT-registered business making zero-rated sales can still claim back the input VAT on expenses used to make those sales.

An exempt supply falls outside the VAT system entirely. It does not count toward the R1 million threshold, and any VAT you paid on expenses used to make an exempt supply cannot be claimed back at all. If your business only makes exempt supplies, you cannot register for VAT even voluntarily, because there is no taxable activity to register against.

Same R0 on the invoice, different rules behind it

The line that actually matters is whether input VAT can be claimed back. Everything else follows from that one distinction.

Common zero-rated supplies

Zero-rating exists mostly to keep essentials affordable and to avoid taxing exports twice. The list is fixed in the VAT Act and includes, among others:

• →Exported goods, and services supplied to a non-resident who is outside South Africa when the service is rendered
• →A defined list of basic foodstuffs: brown bread, maize meal, rice, fresh vegetables and fruit, milk, and a handful of others
• →International transport of passengers and goods
• →The sale of a going concern, under specific conditions set out in the Act

If your business supplies any of these, you still register for VAT the normal way once you cross the R1 million threshold (or earlier, voluntarily), you still submit a VAT201, and you still claim back input VAT on your expenses. See our guide to VAT registration if you have not registered yet.

Common exempt supplies

Exemption is different: it is a deliberate carve-out for activities the Act decides should sit outside VAT altogether, most often because taxing them would be impractical (financial services) or against public policy (education, residential housing). Common exempt supplies include:

• →Renting out residential accommodation (a home, a flat, a room let for dwelling purposes)
• →Most financial services: lending money, life insurance, and similar, though a fee charged on top (like a bank's admin fee) can still be taxable
• →Educational services provided by a school, further education college, or similar recognised institution
• →Public transport by road or rail for fare-paying passengers

A business that makes only exempt supplies (a residential landlord with no other income, for example) has no taxable turnover at all, so it cannot register for VAT, not even voluntarily, and cannot claim back VAT on repairs, rates, or anything else bought for that exempt activity.

Mixed supplies: when a business does both

Plenty of small businesses make a mix of standard-rated, zero-rated, and exempt supplies in the same month, a consultant who mostly bills locally at 15% but occasionally invoices an overseas client at 0%, for example. In that case, only the standard-rated and zero-rated turnover counts toward the R1 million registration threshold, and input VAT on general overheads (rent, a laptop, accounting software) has to be apportioned between taxable and exempt use rather than claimed in full. If your exempt activity is small relative to the rest of the business, this is exactly the kind of split a bookkeeper or accountant should confirm, since SARS applies its own apportionment method rather than leaving it to a rough guess.

Invoicing the two correctly

A zero-rated sale still needs a proper tax invoice, VAT number included, with the VAT amount shown as R0.00 (or the rate shown as 0%) rather than the VAT line left off entirely. An exempt sale is not a tax invoice at all, since there is no VAT being levied, so a normal invoice or receipt without any VAT wording is correct. Our invoice generator handles the zero-rated case automatically once your VAT number is set and the line item rate is 0%; for a purely exempt supply, leave your VAT number off that specific invoice or use a plain document instead. If you are still deciding whether to register for VAT at all, our free VAT calculator works out the 15% either direction on any standard-rated amount.

Sources

• ↗SARS: Value-Added Tax
• ↗SARS: VAT 404 Guide for Vendors

Disclaimer: This article is for general information and does not constitute tax, accounting, or legal advice. The lists of zero-rated and exempt supplies above are illustrative, not exhaustive, and the VAT Act sets out the full and current detail. Apportionment rules for mixed taxable and exempt activity are complex; confirm your specific position with a registered tax practitioner or accountant before relying on it.