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What is VDS

In Bangladesh, VAT Deduction at Source (VDS) is a mechanism where certain designated entities are required to deduct Value Added Tax (VAT) from payments made to suppliers or service providers at the time of payment. This system ensures the collection of VAT at the source, facilitating compliance and revenue collection.​

Who Must Deduct VAT at Source?

The following entities are mandated to withhold VAT under the VDS system:​

  • Government entities
  • Non-governmental organizations (NGOs) approved by the NGO Affairs Bureau or the Directorate General of Social Welfare
  • Banks, insurance companies, and similar financial institutions
  • Secondary or post-secondary educational institutions
  • Limited companies
  • Entities with an annual turnover exceeding BDT 100 million​

When Is VDS Applicable?

VDS is applied when these entities procure specific goods or services. For instance, services such as those provided by air-conditioned hotels are subject to a 15% VDS rate, while non-air-conditioned hotels are subject to a 7.5% rate.​

Key Points to Note

  • VDS is not an additional tax but a method of collecting VAT at the source.
  • The responsibility to deduct and remit VAT lies with the withholding entity.
  • Proper documentation, such as VAT invoices and certificates, is essential to ensure compliance.​

This system is designed to streamline VAT collection and reduce evasion by capturing tax at the point of transaction.

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What is withholding Tax

Withholding tax (WHT) refers to the income tax that a payer (either resident or non-resident) is obligated to deduct at the source when making certain specified payments. This mechanism ensures tax collection at the point of payment, streamlining the process for both the payer and the government.

Key Aspects of Withholding Tax in Bangladesh

  • Obligation to Withhold: Payers are required to withhold tax when making payments such as salaries, execution of contracts, supply of goods, manufacturing, printing, royalties, services, commissions, rent, dividends, and payments to non-residents. ​NBR Bangladesh
  • Withholder Identification Number: Every person responsible for deducting or collecting tax must obtain a Withholder Identification Number. ​Worldwide Tax Summaries Online
  • Filing Returns: Entities must file a Return of Withholding Taxes under Section 75A of the Income Tax Ordinance, 1984. The first return is due by January 31 of the financial year in which the deduction or collection was made, and the second return by July 31 of the following financial year.
  • Schedules and Documentation: Specific schedules (e.g., 24AA, 24AB, 24AC) must be attached to the return, detailing the sources and amounts of tax withheld. ​

This system ensures that the government receives tax revenues promptly and reduces the burden on taxpayers by collecting taxes at the source of income.