Every company, NGO, and government body in Bangladesh that pays vendors, contractors, or landlords must deduct withholding taxes. TDS (Tax Deducted at Source) under the Income Tax Act 2023, and VDS (VAT Deducted at Source) under the VAT & SD Act 2012 are critical compliance obligations. Getting them wrong attracts surcharges, interest, and legal penalties. This guide explains the entire system with practical examples.
TDS vs VDS: Key Differences
TDS vs VDS Comparison
| Feature | TDS | VDS |
|---|---|---|
| Governing Law | Income Tax Act 2023 | VAT & SD Act 2012 |
| What is deducted | % of base bill (income tax) | VAT amount on invoice |
| Applies when | Qualifying payment made | Payment + Mushak 6.3 issued |
| Rate varies by | Payment category, TIN status | VAT rate (standard 15%) |
| Deposit deadline | 7th of following month | 15th of following month |
| Annual return | S.186 return by 31 January | Monthly VAT return |
TDS Rates (IT Act 2023, FY 2025-26)
Key TDS Rate Schedule
| Payment Type | Section | With TIN | Without TIN |
|---|---|---|---|
| Supply of Goods / Contract | S.86 | 5% | 7% |
| Service Charge (general) | S.89 | 10% | 15% |
| Professional / Technical Svc | S.89A | 10% | 12% |
| House / Property Rent | S.92 | 5% | 5% |
| Bank Interest / Savings | S.96 | 10% | 10% |
| Import via L/C | S.104 | 5% | 5% |
| Advertising / Media | S.120 | 4% | 6% |
| Transport / Carriage | S.123 | 2% | 3% |
| Commission / Brokerage | S.125 | 10% | 12% |
Note
Vendors without a valid E-TIN attract higher withholding rates. Free E-TIN registration at etaxnbr.gov.bd. Encourage vendors to register — it reduces withholding and simplifies their filing.
Mushak 6.3 and VDS
Mushak 6.3 is the standard VAT invoice under VAT Rules 2016 (Rules 40-43). A VAT-registered vendor must issue it for every taxable supply. VDS only applies if a valid Mushak 6.3 has been issued — without it, the buyer should NOT withhold VDS and the vendor remains solely responsible for depositing VAT through their own monthly return.
Step-by-Step TDS and VDS Calculation
- 1Identify the base bill: e.g. ৳1,00,000 (excluding VAT).
- 2Calculate VAT: ৳1,00,000 × 15% = ৳15,000. Gross = ৳1,15,000.
- 3Identify TDS category: e.g. Professional Service (S.89A).
- 4Check TIN status: Has TIN → TDS rate = 10%.
- 5Calculate TDS: ৳1,00,000 × 10% = ৳10,000.
- 6Check Mushak 6.3: Issued → VDS = ৳15,000 (full VAT withheld).
- 7Net payable: ৳1,15,000 − ৳10,000 − ৳15,000 = ৳90,000.
- 8Buyer deposits ৳25,000 to NBR via challan by 7th of next month.
Compliance Deadlines
Withholding Tax Calendar
| Obligation | Deadline | Penalty |
|---|---|---|
| Deposit TDS | 7th of next month | 2%/month surcharge |
| Issue Annex-A certificate | Within 30 days | Penalties under S.186 |
| Deposit VDS (Mushak 11 Gha) | 15th of next month | 2%/month interest |
| Monthly VAT return | 15th of next month | VAT Act S.85 penalties |
| Annual TDS return (S.186) | 31 January | Legal proceedings |
Tip
Set internal deadlines on the 5th and 13th of each month to prepare TDS/VDS documentation — this gives a buffer before the statutory 7th and 15th deadlines.
Common Mistakes
- Applying TDS on gross bill (incl. VAT): TDS applies only on the base bill. Over-deduction creates disputes.
- Deducting VDS without Mushak 6.3: Without the invoice, VDS should not be withheld.
- Wrong TDS category: Misclassifying supply of goods (S.86, 5%) as a service (S.89, 10%) overpays.
- Not verifying TIN status: Build TIN verification into vendor onboarding.
- Late deposits: Even one day late triggers 2%/month surcharge. NBR audits are increasing.
References
Based on: Income Tax Act 2023 — NBR (Sections 85–131), VAT & SD Act 2012 (Sections 49–52), VAT Rules 2016 (Rules 40–43 on Mushak 6.3), NBR Withholding Tax Manual. Verify at nbr.gov.bd or with a CA registered with ICAB.