Withholding Tax (TDS & VDS) Rates Schedule & Withholding Certificates

In Bangladesh corporate and commercial operations, Withholding Tax is the most critical and scrutinized daily compliance obligation. Comprising two distinct statutory mechanisms—Tax Deduction at Source (TDS) governed by the *Income Tax Act 2023* and VAT Deduction at Source (VDS) governed by the *Value Added Tax and Supplementary Duty Act 2012*—withholding rules mandate that buyers and service recipients deduct tax before releasing payments to vendors, landlords, and professionals.

Failing to deduct or deposit withholding tax triggers severe corporate consequences: personal liability for managing directors under Section 143, statutory penalty interest of 2% per month, and the catastrophic complete disallowance of the underlying operating expense under Section 49 / 55 of the Income Tax Act. Furthermore, failing to issue statutory certificates (such as Form Mushak 6.6) exposes businesses to immediate penal sanctions under VAT law.

Operational Rule: TDS and VDS are legally independent. A single commercial transaction (such as renting an office or hiring a legal consultant) may simultaneously require deducting both TDS (under direct tax law) and VDS (under indirect tax law) at their respective statutory rates, each deposited via separate economic codes.

Who is a Statutory Withholding Entity (Specified Person)?

Not every purchaser is legally authorized or required to deduct tax at source. The law designates specific categories of commercial actors as Withholding Entities:

1. TDS Withholding Entities (Section 86, Income Tax Act 2023)

Any company incorporated under the Companies Act 1994, registered partnership firms, foreign branch/liaison offices, commercial banks, financial institutions, statutory government bodies, local government authorities, NGOs, hospitals, educational institutions, and any business enterprise whose annual turnover exceeds statutory thresholds.

2. VDS Withholding Entities (Section 49, VAT Act 2012)

Government bodies, semi-government agencies, autonomous authorities, NGOs, banks, insurance companies, non-bank financial institutions (NBFIs), limited companies (Private and Public Ltd), and enterprises registered under the Large Taxpayers Unit (LTU-VAT).

Comprehensive TDS Rates Schedule under Income Tax Act 2023

The following schedule outlines the statutory Tax Deduction at Source (TDS) rates applicable to core business transactions under Chapter VII of the Income Tax Act 2023:

The 50% Surcharge Rule (Section 140): Under the Income Tax Act 2023, if a payee or vendor fails to produce an authenticated 12-digit e-TIN certificate or fails to provide proof of tax return submission (PSR) under Section 264, the withholding entity MUST increase the statutory TDS rate by exactly 50% (e.g., a 10% rate increases to 15%; a 5% rate increases to 7.5%).

Comprehensive VDS Rates Schedule under VAT Act 2012

Under Section 49 and the statutory VDS Rules (amended under current NBR SROs), Value Added Tax Deduction at Source (VDS) applies to designated goods and commercial services:

When is VDS NOT Deducted?

To prevent illegal double taxation, VDS is strictly prohibited under the following statutory circumstances:

• If the supplier of goods or services issues a standard Mushak 6.3 invoice featuring standard 15% VAT, provided the item is NOT listed among the mandatory 43+ services in the statutory VDS schedule.

• On utility bills (electricity, water, gas, telephone) where VAT is directly billed by utility providers and collected via banking channels.

• Zero-rated direct export supplies or deemed export transactions.

• Goods supplies where the manufacturer supplies goods directly from their registered factory premises with a 15% standard Mushak 6.3.

Statutory Withholding Certificates: TDS Certificate vs. Form Mushak 6.6

Deducting tax is only half the legal obligation; the withholding entity must issue authentic statutory certificates to substantiate the deductions for the payee:

Critical VDS Deadline: Under Rule 40 of the VAT Rules 2016, Form Mushak 6.6 must be issued in triplicate within exactly 3 working days from the date payment is made to the vendor. If a company fails to deliver Form Mushak 6.6, the vendor CANNOT claim a Decreasing Adjustment on their monthly Mushak 9.1, triggering commercial disputes and regulatory fines.

Treasury Deposit Schedules and Economic Codes

Withheld funds are held in trust for the government and must be deposited into the Bangladesh Government Treasury without delay:

1. TDS Treasury Deposit Timeline

• Under Income Tax Rules, taxes deducted at source must be deposited via automated A-Challan within 2 to 7 working days from the deduction date (or by the following Wednesday/Sunday depending on specific withholding guidelines).

• For deductions made in June (closing month of the fiscal year), deposits must be completed on or before 30 June.

2. VDS Treasury Deposit & Adjustment Mechanism

• If the withholding entity is a BIN-registered company, VDS withheld during the month is recorded in Part 5 (Increasing Adjustment) of its monthly Mushak 9.1 return.

• The company pays the net tax balance via Treasury Challan under the designated VAT economic code (1/1133/...) on or before the 15th of the following calendar month.

• Non-BIN withholding entities (such as government projects or unregistered bodies) must deposit VDS within 15 days of deduction via Treasury Challan.

Mandatory Quarterly TDS Statements (Section 177)

In addition to monthly challans, every withholding entity must file a formal Quarterly Statement of Withholding Tax (Form IT-116) with their jurisdictional Taxes Circle:

Top 5 Costly Withholding Mistakes to Avoid

• 1. Disallowance of Expenses Under Section 49 / 55: Paying vendor bills, office rent, or legal fees without deducting TDS. During annual assessment, the DCT will summarily disallow the entire expense from your profit and loss statement, artificially inflating taxable profits and imposing 27.5% tax plus penalties.

• 2. Delaying Form Mushak 6.6 Beyond 3 Working Days: Failing to issue Form Mushak 6.6 to suppliers within 3 working days, preventing suppliers from taking decreasing adjustments and exposing the company to statutory VAT fines under Section 85.

• 3. Overlooking the 50% Non-TIN Surcharge: Deducting base TDS (e.g., 10%) when a vendor fails to produce their 12-digit e-TIN or PSR, instead of the mandatory 15% rate, leaving the withholding entity personally liable for the 5% difference.

• 4. Double-Withholding on Standard 15% Mushak 6.3 Goods: Deducting VDS from manufacturers or suppliers who already issued a valid Mushak 6.3 with 15% standard VAT for non-scheduled goods, resulting in vendor billing disputes and audit reconciliation errors.

• 5. Accumulating TDS Funds in Corporate Bank Accounts: Holding withheld taxes in company operating accounts for weeks before depositing, which incurs statutory delay interest of 2% per month under Section 143.

Frequently Asked Questions (FAQs)

1. What is the difference between TDS and VDS in Bangladesh?

TDS (Tax Deduction at Source) is an advance deduction of direct income tax governed by the *Income Tax Act 2023*, reducing the recipient's annual corporate or personal income tax bill. VDS (VAT Deduction at Source) is an advance collection of indirect consumption tax under the *VAT Act 2012*, adjusted by the supplier as a Decreasing Adjustment on their monthly Mushak 9.1 VAT return.

2. When must Form Mushak 6.6 be issued to a vendor?

Under Rule 40 of the VAT and SD Rules 2016, a withholding entity must issue Form Mushak 6.6 in triplicate within 3 working days from the date payment is made to the supplier.

3. What happens if a company fails to deduct TDS from a vendor bill?

The company faces three severe consequences: (a) the Deputy Commissioner of Taxes (DCT) will completely disallow the expense from the company's annual tax return under Section 49/55, (b) the company is treated as an assessee-in-default and must pay the un-deducted tax plus 2% monthly interest under Section 143, and (c) the company faces penalty proceedings under Section 266.

4. Do I need to deduct both TDS and VDS on commercial office rent?

Yes. When renting commercial office premises from a landlord, a corporate tenant must deduct 5% TDS under direct tax law and 15% VDS under indirect tax law from the monthly rental payment, issuing both a TDS Certificate and Form Mushak 6.6.

5. What is the penalty for not having an e-TIN when receiving payment?

Under Section 140 of the Income Tax Act 2023, if a vendor or payee fails to produce a verified 12-digit e-TIN or Proof of Submission of Return (PSR), the withholding entity is legally mandated to increase the base TDS rate by 50%.

6. When are Quarterly Withholding Tax Statements due?

Statements must be filed four times a year by the 15th of October, 15th of January, 15th of April, and 15th of July with the jurisdictional Taxes Circle.