Standard-rated supplies carry VAT at 15%. Zero-rated supplies are taxable supplies charged at 0% — you claim input VAT on the costs of making them, and they count towards the VAT registration threshold. Exempt supplies are outside the VAT system entirely — no output VAT, no input VAT claim on related costs, and they do not count towards the threshold. Zero-rated is good for you. Exempt usually is not.
The words sound interchangeable and the consequences are opposite. This single distinction decides whether some businesses should be VAT registered at all.
The three categories side by side
| Standard-rated | Zero-rated | Exempt | |
|---|---|---|---|
| VAT charged | 15% | 0% | None — outside the system |
| Is it a taxable supply? | Yes | Yes | No |
| Claim input VAT on related costs? | Yes | Yes | No |
| Counts towards the registration threshold? | Yes | Yes | No |
| Typical effect on your VAT return | You pay VAT over | Often a refund | Nothing to declare |
The row that matters most is the third. A zero-rated supplier charges nothing to the customer and still recovers the VAT on their inputs — which frequently puts them in a permanent refund position. An exempt supplier charges nothing and recovers nothing, so all the VAT in their supply chain becomes a cost they absorb.
What is zero-rated?
Taxable supplies charged at 0%. They are inside the VAT system, they just carry a rate of zero.
The main categories include:
Exports of goods, subject to strict documentary requirements.
Certain basic foodstuffs — a defined list of staples, not "food" generally. This catches food businesses constantly: the raw ingredients on the list are zero-rated when sold as those items, but a prepared meal is standard-rated.
Certain services supplied to non-residents, where the requirements are met.
Certain fuel and related supplies.
The sale of a business as a going concern, where the specific conditions are satisfied.
Two practical warnings.
Zero-rating is conditional, and the conditions are documentary. An export zero-rated without the required proof of export is an export SARS will assess at 15% — payable by you, out of a price that never included it. Keep the documentation as though a verification is coming.
Do not assume by category. Whether a specific item is zero-rated depends on how it is defined in the Act, not on whether it feels like a staple.
What is exempt?
Supplies outside the VAT system. No VAT is charged, and no input VAT may be claimed on costs incurred to make them.
The main categories include:
Residential accommodation — letting a dwelling. Commercial letting is standard-rated, and this distinction is the whole VAT position of most property businesses.
Most financial services, including interest.
Public transport of fare-paying passengers by road or rail.
Educational services provided by qualifying institutions.
Certain services by bodies corporate and share block companies.
The consequence is worth stating plainly. A residential landlord earning R3 million a year is not required to register for VAT and generally cannot — residential rental is exempt, so those receipts do not count towards the threshold. And the VAT on their maintenance, agents' fees and repairs is a cost they simply carry.
Why does this matter for registration?
Because the threshold test is on taxable supplies, and exempt supplies are not taxable supplies.
Three worked positions:
An exporter. R2.5 million of exports, all zero-rated. Those are taxable supplies. They count in full towards the compulsory threshold, so this business is liable to register — despite charging 0% on every sale. Once registered it claims input VAT on everything and sits in a refund position most months. That is a good outcome.
A residential landlord. R3 million of residential rental. Exempt. It does not count towards the threshold at all, and the landlord is nowhere near registration.
A mixed business. A landlord with R2.6 million residential and R400,000 commercial. Only the R400,000 counts. They could register voluntarily in respect of the commercial letting, but would then have to apportion input VAT across a building used mostly for exempt purposes — administratively painful for limited benefit.
See the VAT registration threshold and is voluntary VAT registration worth it.
What if I make both taxable and exempt supplies?
Then you are into apportionment, and it needs doing properly.
Where a cost relates wholly to taxable supplies, claim the input VAT in full.
Where it relates wholly to exempt supplies, claim nothing.
Where it relates to both — rent, electricity, accounting fees, administration — you may claim only the portion attributable to taxable supplies, calculated on a permissible apportionment basis.
Three things to know.
The default method is turnover-based, and other methods generally require SARS approval.
Do it consistently and document it. An apportionment calculation you cannot explain is an apportionment that will not survive a verification.
Mixed supplies are where VAT audits find money. If a meaningful part of your income is exempt, this is worth getting professional help with rather than estimating. See what happens in a VAT audit.
The mistakes that cost the most
Treating exempt income as zero-rated on the registration test. Leads to registering when you did not have to, or believing you must register when you need not.
Leaving zero-rated sales out of the threshold calculation. Exports count. Businesses that export heavily are frequently liable long before they realise, and late registration means backdated output tax with penalties and interest.
Zero-rating an export without the documentation. SARS assesses at 15% on a price that never included it.
Claiming full input VAT while making exempt supplies. Straightforward over-claim, and one a verification finds quickly.
Assuming food is zero-rated. A defined list of basic items is. A prepared meal is not. See accounting for restaurants and coffee shops.
Confusing exempt with "not registered". A business that is simply below the threshold is making taxable supplies at 15% that it does not have to charge yet. That is not the same as making exempt supplies — and the difference matters when it grows.
Frequently asked questions
What is the difference between zero-rated and exempt for VAT? Zero-rated supplies are taxable supplies charged at 0% — you claim input VAT on related costs and they count towards the registration threshold. Exempt supplies are outside the VAT system: no output VAT, no input VAT claim, and they do not count towards the threshold.
Do zero-rated sales count towards the VAT registration threshold? Yes, in full. Exports are the common example, which is why heavy exporters are frequently liable to register despite charging 0% on every sale.
Do exempt supplies count towards the threshold? No. A residential landlord earning R3 million from rental is nowhere near the threshold, because residential rental is exempt.
Can I claim input VAT on costs relating to exempt supplies? No. The VAT on those costs is absorbed by the business. Where costs relate to both taxable and exempt supplies, only the portion attributable to taxable supplies may be claimed, on a permissible apportionment basis.
Is residential rental VAT exempt in South Africa? Yes, letting a dwelling is exempt. Commercial letting is standard-rated, and that distinction determines the VAT position of most property businesses.
Is all food zero-rated? No. A defined list of basic foodstuffs is zero-rated. Prepared meals are standard-rated, which is why restaurants cannot simply treat food sales as zero-rated.
What happens if I zero-rate an export without proper documentation? SARS can assess the supply at 15%, payable by you out of a price that never included VAT. Zero-rating is conditional on meeting the documentary requirements.
How do I apportion input VAT if I make both kinds of supply? Claim in full where a cost relates wholly to taxable supplies, claim nothing where it relates wholly to exempt supplies, and apportion the rest — ordinarily on a turnover basis, with other methods generally requiring SARS approval.
Get the classification right before the threshold test
Most VAT problems in small businesses are not calculation errors. They are classification errors — treating something as exempt that is zero-rated, or the reverse — and the consequence lands on the registration decision, the threshold test and every input claim afterwards.
Smartbook classifies your supplies correctly, tracks your rolling 12-month taxable supplies against the threshold, handles apportionment where you make both kinds of supply, and keeps the documentation that zero-rating depends on.
See monthly accounting plans →
Last reviewed: 28 August 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. The categories of zero-rated and exempt supplies are defined in the VAT Act and are amended from time to time — confirm the treatment of your specific supplies with SARS or your practitioner. General guidance, not advice on your circumstances.
Primary sources: SARS — Value-Added Tax · Value-Added Tax Act 89 of 1991 · SARS — VAT 404 Guide for Vendors