VAT Rates and Selecting the Correct Rate

When issuing invoices, the VAT rate is often selected without a second thought: "we usually charge 20%."

However, the rate depends on the product or service itself, and for some groups, it turns out differently than expected. The wrong choice puts a burden on both you and your customer.

How is the rate determined?

There is a three-tier structure in Turkey: a general rate and two reduced rates. Which product or service falls under which rate is defined in the lists attached to the VAT Law.

The critical point is this: the rate is determined not by the commercial name of the product, but by how it is defined in the list. Two products that appear in the same category may be subject to different rates.

The lists can be changed by presidential decrees. Therefore, the approach of "we always use this rate" can silently become incorrect after a decree.

Most commonly confused areas

Food products. The distinction between basic food and processed products, ready-to-eat packaging, and the place of sale (dine-in vs. takeout) can change the rate.

Service + materials combined. If a job involves both materials and labor, whether it is billed as a single transaction or as separate items affects the rate.

Shipping and installation fees. Transportation and setup included in the price of the sold goods are generally subject to the main product's rate; the situation may change if billed separately.

Exchange rate differences, maturity differences, and campaign discounts. Since these are elements dependent on the main transaction, they follow the rate of the main transaction. We covered this topic in our exchange rate difference invoice article.

Consequences of the wrong rate

If you used a low rate: tax assessment, late payment interest, and penalties come into play for under-declared VAT. The difference is requested from you; it is often impossible to collect it retroactively from the customer.

If you used a high rate: you will have overcharged the customer. When the customer deducts this VAT, the deduction for the excess portion may be rejected, and the other party will come back to you.

So both directions are problematic. Correction is made by canceling the invoice if you are within the time limit, or via a return invoice if not. We explained both in our cancellation and objection and return invoice articles.

Stopping the error at the source

The solution is not to try to remember the rate at the time of invoicing. Write the rate on the product card; when selecting a product while issuing an invoice, the rate should come up automatically.

This both speeds up the process and prevents different people on the team from using different rates. When a rate changes by decree, you update it in a single place.

In Qolay.App, the rate on the product card carries over to sales and purchase documents; your VAT report is also generated from these records. We explained this workflow in our VAT tracking article.

Frequently asked questions

Where do I find out my product's rate?

Consult your financial advisor for a definitive answer. For ambiguous products, it is also possible to request a private ruling from the Revenue Administration.

Do past invoices get affected if the rate changes?

No. Every document is subject to the rate in effect on the date it was issued. That is why the original rate is preserved in a return invoice.

How does a discount affect VAT?

The discount shown on the invoice reduces the tax base, and therefore VAT decreases as well. Subsequent discounts require a separate document.

Are exemption and zero rate the same thing?

No. In exemptions, VAT is not calculated, and the justification is stated on the document. It is important to show this distinction correctly on the invoice.

The VAT rate is something you never have to think about again once it is set up correctly. When set up incorrectly, it comes back every month.

Open a free account on Qolay.App and define your product cards along with their rates.