GST Exemptions and Zero-Rated Supplies Explained

The Goods and Services Tax (GST) is a broad-based consumption tax applied to the sale of most goods and services. However, certain items are not taxed at the standard rate due to social or economic policies, such as ensuring essential goods remain affordable or promoting key sectors of the economy. This framework creates different classifications for goods and services, leading to distinct tax treatments.

Exempt vs. Zero-Rated Supplies

The distinction between exempt and zero-rated supplies lies in a business’s ability to recover taxes paid on its own expenses. When a business provides an exempt supply, it does not collect GST from the customer. The business is prohibited from claiming Input Tax Credits (ITCs) on the GST it paid for goods and services used to produce that exempt supply. For instance, a financial institution providing exempt services like loans cannot claim ITCs on expenses such as office rent or computer systems.

Conversely, zero-rated supplies are taxable, but the tax rate is set at 0%, so the end consumer pays no GST. The key difference is that a business making zero-rated sales can claim full ITCs for the GST paid on its inputs. For example, a baker who sells zero-rated basic groceries like bread can claim a full refund for the GST paid on business expenses like flour and electricity.

This structure ensures that the tax does not become embedded in the cost of producing certain essential goods, particularly those for export or considered necessities. Businesses dealing primarily in zero-rated goods often receive regular GST refunds, as they collect no tax from sales but can reclaim the tax paid on operational costs.

List of Exempt Goods and Services

Common examples of exempt goods and services include:

• Health care services rendered by recognized medical professionals like doctors, dentists, and optometrists.
• Educational services, including tuition for courses at vocational schools and tutoring services following a designated curriculum.
• Child and personal care services, such as those provided at a daycare center.
• Most financial services, including bank fees for account operations, the issuance of insurance policies, and interest charged on loans.
• Legal aid services provided to individuals with low incomes.
• Long-term residential rents, which helps to manage housing costs for tenants.

List of Zero-Rated Goods and Services

Common examples of zero-rated goods and services include:

• Basic groceries, including staple food items such as milk, bread, vegetables, and meat. Many products considered snacks or beverages are excluded and subject to the standard GST rate.
• Prescription drugs and the associated dispensing fees charged by pharmacists.
• A wide array of medical and assistive devices, including items like wheelchairs, hearing aids, and artificial teeth.
• Feminine hygiene products, such as sanitary napkins and tampons.
• Many agricultural and fishing products, including raw wool, farm livestock, and most fish products sold for human consumption.
• Exports of goods and services sold to non-residents, which ensures they remain competitive in international markets.

Business Obligations and Input Tax Credits

The nature of the supplies a business provides directly impacts its GST registration and reporting obligations. A business that provides taxable supplies, including zero-rated ones, must register for GST if its total worldwide taxable revenues exceed the small supplier threshold, which is $30,000 over four consecutive calendar quarters.

For businesses that provide a mix of taxable and exempt supplies, the rules for claiming ITCs become more complex. These businesses must allocate their inputs and expenses to determine the correct amount of ITCs they can claim. This allocation is governed by the principle of fairness and reasonableness, and the method used must be applied consistently throughout the fiscal year.

Inputs must be categorized based on their use. Expenses directly related to making taxable supplies, such as the cost of goods sold for a retail product, are eligible for a full ITC claim. The most complex category involves overhead expenses that support both taxable and exempt activities, such as rent for a building that houses both types of operations or general office supplies.

For these shared inputs, the business must use a fair and reasonable method to apportion the GST paid. For example, a pharmacy selling zero-rated prescription drugs and taxable retail goods might allocate its rent expense based on the square footage dedicated to each activity to determine the portion of the ITC it can claim.

Exemptions for Public Service Bodies

Public Service Bodies (PSBs), such as charities, non-profits, municipalities, and hospitals, operate under unique GST rules. These entities often provide a significant number of exempt supplies, such as a charity making supplies for little or no consideration as part of its activities.

To address the financial burden of unrecoverable GST, a special mechanism known as the PSB rebate was created. This rebate allows eligible PSBs to recover a percentage of the GST paid on expenses related to their exempt activities. The rebate offers partial relief, acknowledging the value of the services these organizations provide to the public.

The rebate percentage varies depending on the type of PSB. For example, registered charities and qualifying non-profit organizations can claim a 50% rebate of the GST paid. Municipalities may be eligible for a 100% rebate, while hospital authorities and universities have their own specific rates, such as 83% and 67% respectively.