Tax Exemptions: Why Are Some Goods VAT-Free?

Part 11 of 20 · Beginner-friendly guide

Tax Exemptions in Korea: Why Are Some Goods VAT-Free?

Exempt ≠ Zero-rated. See how VAT exemptions lower living costs, which items qualify, and why input VAT is not refundable for exempt supplies.

Contents 1) What is a VAT exemption? 2) Common exempt items & services 3) Exempt vs Zero-rated (clear comparison) 4) Obligations of exempt businesses 5) Pitfalls & quick checks 6) Summary & what’s next 7) Disclaimer

1) What is a VAT exemption?

VAT shall not be imposed on certain goods/services listed in law—mainly to support social fairness by keeping essentials affordable. Unlike the 0% (zero-rate) for exports, exemptions target domestic consumption of necessities such as food, education, and medical care.

Key idea: Exemption breaks the VAT chain at the final sale—no output VAT is charged, but input VAT on purchases generally stays as a cost to the seller.

2) Common exempt items & services

• Food & daily necessities: basic unprocessed foods (e.g., rice, salt, peppers), tap water; certain fuels (e.g., coal briquettes); qualifying national-housing sized residences.
• Welfare & health: medical services by doctors, dentists, oriental medical doctors; funeral services; post-partum care; childcare.
• Education & culture: school tuition; registered private tutoring; books, newspapers, magazines; qualifying broadcasting.
• Assets & personal services: supply of land; certain personal services (authors, composers, athletes, lecturers, insurance solicitors) under conditions.

Exact scope is statute-driven; check current law and interpretations for your case.

3) Exempt vs Zero-rated (clear comparison)

Feature	Tax Exemption (e.g., selling rice)	Zero-rated (e.g., exporting rice)
Output VAT	Not imposed (treated as 0)	0% rate applied
Input VAT paid	Yes (on purchases)	Yes (on purchases)
Input VAT refundable?	No (remains a cost)	Yes (refund/credit available)
Main purpose	Social policy—lower cost of essentials	Destination principle & export competitiveness

Rule of thumb: If your sale is exempt, expect no output VAT and no input refund. If it’s zero-rated, you charge 0% but can still recover input VAT with proper evidence.

4) Obligations of exempt businesses

• VAT filing: Exempt businesses generally do not charge VAT nor claim input credits for exempt sales.
• Mixed suppliers (taxable + exempt): Track separately. Only input VAT attributable to taxable supplies is creditable; allocate fairly (pro-rata).
• Invoicing: Issue ordinary receipts for exempt sales; tax invoices are for taxable/zero-rated supplies.
• Record-keeping: Keep ledgers showing exempt vs taxable turnover and input allocation basis.

5) Pitfalls & quick checks

• Confusing exemption with 0%: Exemption usually forfeits input VAT recovery; 0% allows recovery.
• Mixed activities: Don’t claim full input VAT if part of your sales are exempt—use pro-rata allocation.
• Wrong classification: Some processed foods or premium services may be taxable—check product/service codes.
• Contract wording: Clearly state whether the supply is exempt, taxable (10%), or zero-rated (0%); avoid invoice ambiguity.

Pro tip: Create a one-page matrix of your SKUs/services with VAT status (Exempt / 10% / 0%) and the documentary evidence needed.

6) Summary & what’s next

• Exemption supports affordability of essentials but blocks input VAT recovery.
• Zero-rating supports exports and still lets you claim input VAT refunds.
• For mixed businesses, segregate and allocate inputs to stay compliant.

Next (Part 12): Personal Income Tax—how your paycheck is taxed (withholdings, brackets, and credits).

7) Disclaimer

This post is for general information only and not legal/tax advice. VAT scopes and interpretations change; consult a qualified professional for your facts.

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