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4 February 2019

How to distinguish exceptions from exemptions?

Every country has a special list of goods and services that are excluded or exempt from value-added tax regulations. There are various reasons for such a procedure, they usually and almost certainly cover goods or services maintained by socially important institutions (such as cultural or education venues) or nationwide systems such as healthcare and financial industry.

Similarities

In both cases, there is no need for calculation of the tax value, because it is either 0 or nonexistent (we will get to that). Also, both are applied to whole specific groups of products or when specific conditions are met.

Differences

Although the difference between exception and exemption may seem hard to catch at first glance, the two special fiscal permissions differ significantly.

The most important difference is the application of both mechanisms. The exception is like the override of VAT regulations – they simply do not apply for certain goods and products. Hence there is no tax rate. In case of exemption, the provisions from the VAT Act do apply, but the tax rate is fixed to a 0 percent value.

Further aspects follow from this division. In the case of the exception, the entrepreneur does not have to report the turnover, because there is no VAT rate charged for goods and services sold. The sales should not be registered in the VAT register. On the other hand, if there’s no tax calculated, an entrepreneur cannot expect to use deduction of costs for the services or goods he purchased that are compatible with the company’s or business’ lineament.

The exemption, as it utilizes a 0% VAT rate, gives the business owners the right to get back the VAT amount paid for goods and services for work purposes. Regarding annual VAT settlements, exempted goods/services must be listed as separate items, not to be confused with regular sales. In other words, companies that sell goods/services that are exempt from the VAT duty should not add VAT on their invoices, but they still have the right to deduct VAT on products and services they have purchased for operation.

Examples

Below we list examples of industries covered by exception regulations:

  • Health service and alternative health care – including services covered by the Municipal Health Services Act, the Dental Health Services Act, the Specialist Health Services Act and services that are included under sections 5 and 10 of the National Insurance Act. Alternative treatment is also included in the exception and applies to homeopathy, acupuncture, osteopathy, reflexology, and aromatherapy, only if the practitioner is authorized or licensed.
  • Education – regarding schools (classroom, leisure education, driving schools and other public and private organizations engaged in teaching. This also includes consumer sales in such institutions (i.e. canteens) and the provision of educational services.
  • Culture – cultural venues and institutions like theaters, operas, circus, live music performances.
  • Financial services – insurance, management of mutual funds.
  • Real estate industry – sale and rental of properties and services included such as electricity, water, heating, etc.

Most important exemption examples include:

  • Books and audiobooks excluding e-books, hence all printed books are exempt.
  • Weekly and daily press – namely all newspapers sold in a paper form.
  • Transportation – regarding the sale of specific vehicles, boats, and aircraft.

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ARPI Regnskap is a part of ARPI Group, a Norwegian holding which started to operate in Poland in 2001.

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