Classification of Goods and Services for VAT Purposes

For VAT purposes, goods and services are classified into three broad groups:

  1. Standard Rated Supplies: These are goods and services not zero rated or exempt,chargeable to VAT at the standard rate of 19.25%.
  2. Zero Rated Supplies; These are goods and services which are subject to a positive rate of VAT of nil percent e.g. exported supplies and all supplies made to businesses situated in the free trade and industrial zone.
  3. Exempt or Exonerated Supplies: These are goods and services which are which are not subject to VAT, such as products of basic necessity.

VAT is charged on taxable supplies but not on exempt supplies or supplies which are outside the scope of VAT, it is therefore important to be able to correctly classify supplies (goods & services) in order to determine whether VAT should be charged. It is also important to correctly classify supplies  for the following reasons:

  • Only taxable supplies are taken into consideration in determining whether a trader needs to register for VAT
  • VAT on purchases or consumption made for exempt supplies are not recoverable

DIFFERENCE BETWEEN ZERO-RATED AND EXEMPT TRANSACTIONS

Traders making exempt supplies or transactions cannot charge VAT to their customers. Traders making zero rated supplies charge VAT to their customers but at 0%. It is important to differentiate between exempt and zero rated transactions because businesses making zero rated transactions will be registered for VAT purposes while those making exempt transactions only will not register for VAT purposes and cannot therefore recover VAT paid on purchases.