What is VAT?

Value-added tax (VAT), is a type of consumption tax on goods and services. It is also known as goods and services tax (GST) in Singapore.

Governments charge VAT/GST at every stage of the supply chain, from when something is manufactured right through to the point it’s sold. Essentially, the government adds VAT whenever value is added to the good, hence the name.

In Singapore, most goods and services have GST, with the rate increasing to 9% in 2024. Ultimately, it’s the consumer who pays, but VAT/GST brings in big revenue for governments.

Understanding VAT is key to being compliant, getting your pricing right, and being transparent with your customers. In this article, we’ll dive deeper into how it works, why it matters, and how you can navigate it with confidence. 

Why VAT Matters for businesses and consumers

VAT is crucial for both businesses and consumers, playing a key role in pricing, compliance, and government revenue. 

In Singapore, businesses must register for VAT/GST once their annual turnover exceeds S$1 million. Once registered, they must then charge VAT/GST on sales, keep records, and file returns.

VAT inclusive vs VAT exclusive explained

When it comes to prices, terms like VAT inclusive and VAT exclusive are everywhere. But what do they mean?

A VAT inclusive price is the final price you pay. It already includes VAT, so no extra tax is added at the checkout. Inclusive pricing is consumer-friendly, as it helps customers know exactly what they will be paying.

On the other hand, a VAT exclusive price does not include VAT, so tax is added on top of the quoted figure later. This is useful in B2B settings, as it separates net cost from tax, allowing businesses to easily reclaim input VAT.

Whether a price is inclusive or exclusive also affects calculations, bookkeeping, and customer expectations. You should always indicate whether VAT is included to avoid confusion and ensure compliance. Ultimately, the choice between inclusive and exclusive pricing depends on your audience and legal obligations.

Real life examples of VAT inclusive and exclusive pricing

Here are some examples of VAT inclusive and exclusive pricing:

Example 1 - VAT inclusive: You buy a product with a price tag that reads S$108 (incl. GST). The GST is 8%, so the net price is S$100, and S$8 is the tax. The amount shown on the label, S$108, is the exact amount you pay at the register. Your receipt will show the split, but you weren’t charged extra as it was all built in. This is standard for retail.

Example 2 - VAT exclusive: A supplier quotes a business S$100 + GST. With 8% GST, the final invoice is S$108. The customer pays S$108, but the quote highlighted the S$100 base. This format is best for VAT-registered businesses, which can reclaim the S$8 as input tax. It is common in B2B settings.

Each approach to pricing suits different contexts. For general consumers, inclusive pricing is clearer. For businesses, exclusive pricing offers transparency and tax efficiency. Whatever you use, clarity is key, always label your pricing format.

How to calculate VAT in accounting

VAT affects how businesses record income and expenses. In accounting, you must separate the VAT from the base amount to reflect accurate revenue and liabilities.

• For sales: If a product is sold for S$100 (exclusive), and GST is 8%, the total price is S$108. Record S$100 as revenue and S$8 as GST collected (a liability). If the price was inclusive at S$108, you divide by 1.08 to get the net, S$100 revenue and S$8 GST.
• For purchases: If you buy supplies for S$108 (incl. GST), the net expense is S$100 and S$8 is input tax. Record S$100 as an expense and S$8 as a GST receivable (you can claim this back).

By correctly recording your VAT, you can ensure that you don't overstate your income or expenses. This is important, as mistakes can lead to audits or penalties.

Accounting software, like QuickBooks Online, makes VAT easy, calculating VAT automatically, splitting amounts correctly, and generating VAT reports. All you need to do is tag each transaction as inclusive or exclusive, and the system will do the rest. This not only saves time but also reduces manual errors. 

VAT inclusive and VAT exclusive formulas

Understanding how to calculate VAT isn’t just for accountants, it’s something that every business owner should feel confident doing. Whether you are running a shop, offering services, or creating invoices, knowing how to handle VAT keeps things clear and compliant.

Here are the key VAT inclusive and VAT exclusive formulas that you’ll need:

To calculate the VAT inclusive price (from net price) with the VAT inclusive formula:

Formula: Net Price × (1 + VAT Rate)

Example: S$200 × 1.08 = S$216

To calculate the VAT exclusive price (from net price) with the VAT exclusive formula:

Formula: Total price ÷ (1 + VAT Rate)

Example: S$216 ÷ 1.08 = S$200

To find the VAT amount from a net price:

Formula: Net Price × VAT Rate

Example: S$200 × 0.08 = S$16

To find the VAT amount from a total price:

Formula: Total – (Total ÷ (1 + VAT Rate))

Example: S$216 – (S$216 ÷ 1.08) = S$16

These formulas form the basis of tax calculations, and are essential for quotes, invoices, and tax returns. Use the VAT-exclusive price when you’re adding VAT (e.g., creating a sales invoice), and the VAT-inclusive price when you’re working backwards to find the base amount from a total. Or, to simplify the process, you can use tools like QuickBooks to do this automatically.

How to calculate VAT inclusive amounts

Figuring out the total price including VAT comes in handy when you’re setting prices, creating quotes, or preparing invoices where tax must be clearly shown. This is where the VAT-inclusive formula (from the section above) comes in handy.

For example:

A designer charges S$1,000 for a project. With 8% GST, the total billed is:

• S$1,000 × 1.08 = S$1,080
• The invoice would show:
• Net: S$1,000
• GST: S$80
• Total: S$1,080

This method is useful in retail, services, e-commerce, or anywhere else that clear pricing matters! Clients understand what they are paying and how much goes towards tax.

With QuickBooks, you can simply mark prices as VAT inclusive and it will handle the split automatically, giving you both the net and tax amounts for easier reporting and invoicing.

How to calculate VAT backwards (reverse VAT calculation)

Sometimes, you don’t have the net price, you just have the total. Maybe a receipt only shows the final amount, or you’re reconciling income that includes VAT/GST. That’s when reverse VAT calculations are useful. To do this, refer to the VAT-exclusive formula covered earlier.

For example:

• You received S$270 in payment.
• To find the net amount: S$270 ÷ 1.08 = S$250
• VAT amount: S$270 - S$250 = S$20

Important: Don’t just take 8% of S$270 (S$21.60)—that’s incorrect. VAT must be extracted by division, not subtraction.

This reverse method is useful for recording income correctly or splitting totals for reporting. And again, tools like QuickBooks make this easier by automatically calculating and tagging VAT-inclusive amounts for you.

Common mistakes when calculating VAT and how to avoid them

Even the smallest mistakes in your VAT calculations can lead to big headaches, especially when it comes to audits or filling out accurate returns. Here are some common and how to steer clear of them:

• Wrong rates: One of the biggest slip-ups is using the wrong VAT rate. For example, some businesses in Singapore continued using 7% even after the rate increased to 9%. If you continue to bill customers based on an outdated rate, you are either undercharging or overcharging, which can both hurt your bottom line or land you in trouble with the IRAS.
• Mixing prices: Another common issue is mixing up VAT inclusive and exclusive pricing. Let’s say you quote S$100 for a service, if you write S$100 including GST, but you forgot to add GST on top, you end up absorbing the tax yourself, costing you S$9 per transaction.
• Manual calculations: Errors also commonly appear when manually performing tax calculations, after all, it is easy to mistype a formula or punch in the wrong number, especially if you are juggling multiple invoices. Similarly, rounding mistakes can throw off your totals. The IRAS has strict rounding guidelines, and rounding too early or inconsistently can mess with your reports. 

You can avoid these errors by using cloud-based accounting software, like QuickBooks, which automatically applies the latest VAT/GST rates, uses the correct formulas, and handles rounding the way IRAS wants.

VAT in the global context: Is it the same everywhere?

VAT (or GST) exists in many countries, but the rules can be very different.

Singapore’s VAT/GST rate is 9% as of 2024. In the UK, it’s 20% VAT. Australia and New Zealand apply 10% GST. Canada has federal GST, plus provincial taxes. Meanwhile, the US doesn’t use VAT, just sales tax.

Some countries will even use different rates for different products. For example, essentials like food or kids’ clothes might be taxed less or not at all.

So, if you are trading internationally, don’t assume it’s the same everywhere. Always check local tax rules or use smart tools to handle it for you.

Conclusion: Mastering VAT for smarter business management

Getting your head around VAT might seem tricky at first, but once you understand how it works, it becomes second nature.

To make handling tax easier, you can utilize tools like QuickBooks Online, which automatically applies the correct VAT/GST rate, splits out invoices correctly, and even generates tax reports for you.

Once you master VAT, you can enjoy fewer mistakes, smoother invoicing, improved trust with customers and more time to focus on growing your business.