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How Different Are Zero-Rated And Exempted VAT?

How Different are Zero-Rated and Exempted VAT?


People still get confused on some jargons or terms that the tax system has brought with it. One of the most common questions is what zero-rated and exempted value-added tax (VAT) are.

The thing about the two terms is that they sound like they mean the exact same thing, but in truth, they don’t. This article will tackle the difference between the two so it will be distinguished easily.


Explanation on What Zero-Rated VAT Is

All zero-rated goods and services are those that are exported to a country that belongs to Gulf Cooperation Council (GCC) and does not have any tax system implemented yet.

One of the examples that can be associated with this is the passengers and goods that are internationally transported. This means that any transfer that begins and ends in that country or even just traverses through is included in the latter sample.

In addition, the government does not tax the retail sale of goods and services are subject to zero-rated VAT. The government allows credits for the VAT paid on inputs. Common goods that are subject to zero-rated VAT are food, drugs, and utilities.


Explanation on What Exempted VAT Is

Basically, if a good is under and subject to the exempted VAT, it means that the government does not tax it and credits for VAT paid on inputs are not allowed to be claimed.


The Breakdown of the Difference

Simply, zero-rated goods are taxable at 0% and businesses can claim the VAT they have paid on inputs. Exempted goods and services, on the other hand, are items that are not considered to be taxable but VAT paid on inputs are not allowed to be claimed.


Zero-Rated and Exempted Goods and Services

As per Article 45 of Federal Decree-Law Number 8 of 2017, there are 14 items under the zero-rated VAT. It is a long list of items, such as

(1) direct or indirect exports to GCC countries that do not have VAT,

(2) international transport or can be said to be international airfares,

(3) air passenger transport,

(4) supply of transport for passengers and goods using air, sea, and land means,

(5) goods and services supply for the purpose of the operation, repair, maintenance, or conversion of those means of transport,

(6) use of aircraft and vessels for the purpose of rescue and assistance,

(7) supplication of goods and services for the sole purpose of providing them to be consumed on board aircraft and other transport means,

(8) precious metals that are classified as for investment purposes, etc. These are more than half of the number of items that are under zero-rated VAT.

The list of VAT-exempted goods and services, on the other hand, is shorter than the zero-rated VAT one as it only contains four items, which are

(1) financial services,

(2) supply of residential buildings through sale or lease,

(3) supply of bare land, and

(4) supply of local passenger transport. Although this is the case, it is still a great deal that there won’t be any rise in prices on those four things.

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