VAT Deduction at Source in Bangladesh: 2026

VAT deduction at source in Bangladesh, commonly called VDS, is a payment-control obligation. It is not simply a question of whether a supplier has added VAT to an invoice. A payer that is a statutory withholding entity must first establish the character of the supply, apply the current source-deduction rules, preserve the required tax documents and account for the deduction correctly. The effect can reach both sides of a transaction: the recipient makes the prescribed increasing adjustment and the supplier may make a corresponding decreasing adjustment only when the documentary conditions are met.

Current-position notice: This Insight reflects the position checked on 19 October 2026. The operative framework is the Value Added Tax and Supplementary Duty Act, 2012, the VAT Deduction and Collection Rules, 2025, and the amendment effective from 1 July 2026. It should not be read by reference to the former 2021 source-deduction rules, historic “one-third” explanations or older monetary thresholds. The applicable rate and exception depend on the supply and its evidence at the time of payment. [1] [2] [3]

For organisations buying goods and services in Bangladesh, the practical question is not merely “is this invoice taxable?” It is: is the recipient a withholding entity, is this supply within the current deduction schedule or procurement-provider rule, and does a specific exception apply? That sequence matters because the 2025 Rules establish mandatory rates for listed services and set distinct treatment for procurement providers, imports of services, certain licence-related receipts and rent. [2]

This article explains the present framework in international-English terms. It is designed to help finance, procurement, contract-management and governance teams understand the system and recognise points that need transaction-specific review. For related cross-border, corporate and tax work, see TRW’s practice areas.

Table of contents

What VAT deduction at source is

VDS is a statutory mechanism through which a qualifying recipient deducts or collects VAT connected with a supply and accounts for it to the Government Treasury in the prescribed manner. Under section 49 of the VAT and Supplementary Duty Act, 2012, where a supplier makes a non-exempt and non-zero-rated supply to a withholding entity under an agreement, tender, work order or other means, the withholding entity must withhold the determined VAT from the consideration payable, in the manner set out in the rules. The Act also requires the withholding entity to deduct and deposit VAT on the prescribed conditions and by the prescribed method. [1]

This is important terminology. VDS is not income-tax withholding, even though payment teams may operate both controls at the same point in an accounts-payable process. It is also not an automatic additional tax on top of every purchase. It is a prescribed VAT collection and adjustment mechanism. The supplier remains responsible for issuing the relevant tax invoice, while the withholding entity has its own deduction, payment, certificate and record obligations.

The adjustment consequences explain why documents are central. The recipient that withholds VAT records an increasing adjustment in its relevant return. A registered supplier may claim a decreasing adjustment equal to the VAT withheld, but only in the prescribed way and only after receiving the withholding certificate. The Act gives the supplier the tax period in which payment is made and the following six tax periods to make that adjustment; a claim after that period is time-barred. [1]

The National Board of Revenue, or NBR, continues to identify source deduction as a taxpayer compliance responsibility alongside obtaining and issuing Mushak-6.3 VAT invoices, retaining purchase and sales records, and filing returns. [6] The operational message is clear: VDS should be built into supplier onboarding and payment approval, rather than added as an afterthought when a bill reaches finance.

Which organisations are withholding entities

The starting point is the statutory definition, not a supplier’s commercial description of the customer. Section 2(21) of the Act includes the following categories of withholding entity:

• a government entity;
• an NGO approved by the NGO Affairs Bureau or the Department of Social Services;
• a bank, insurance company or similar financial institution;
• an educational institution at secondary level or above;
• a limited company; and
• a person or institution with annual turnover of at least BDT 10 crore. [1]

The 2025 Rules use an administrative definition that expressly refers to government ministries, divisions and offices; semi-government, autonomous and state-owned bodies; local authorities and similar bodies; approved NGOs; banks, insurers and similar financial institutions; secondary and higher educational institutions; limited companies; and persons or institutions whose annual turnover exceeds BDT 10 crore. [2]

For a business group, this means entity status should be confirmed at the legal-entity level. A company may have a central purchasing function, a branch structure and several projects, but the statutory question remains whether the payer or supply recipient falls within the withholding-entity definition. A contract may allocate tax administration between project participants, but it cannot safely be assumed to displace statutory obligations.

A withholding entity should also distinguish VAT registration from withholding-entity status. The two concepts interact in the rules, particularly for returns, increasing adjustments and certificates, but they are not interchangeable. The Rules prescribe separate steps for a registered source-deduction entity or recipient and for one that is not registered. [2]

Why status mapping belongs before payment

The appropriate time to resolve status is during vendor onboarding, not after a payment is due. A sensible status file identifies the contracting entity, its BIN where applicable, its VAT registration position, its status as a withholding entity and the team responsible for issuing certificates. It should cover shared-service centres and accounts officers where payments are processed centrally.

This approach also helps international businesses. A foreign investor may focus on the supplier’s Bangladesh tax profile, but the recipient’s legal form, annual turnover and project role can determine the recipient’s VDS exposure. Where different group companies enter contracts or make payment, their roles should not be blended without analysis.

When VDS can apply

The Act establishes the broad rule for non-exempt and non-zero-rated supplies to withholding entities. The 2025 Rules then state the cases in which deduction is required and supply the current rate table. Rule 3 applies to supplies under tender, contract, work order or otherwise. For the listed services, a withholding entity must deduct VAT at source at the stated rate, whether or not a VAT invoice accompanies the bill. [1] [2]

The practical analysis therefore has several stages:

1. Identify the payer or recipient. Confirm whether it is a withholding entity.
2. Identify the supply. Determine whether the transaction is goods, a listed service, a procurement-provider supply, an imported service, rent, or a specialised receipt such as a licence or revenue-share payment.
3. Test the statutory VAT treatment. Check whether the supply is exempt, zero-rated or otherwise within a specific exception.
4. Classify against the live schedule and amendments. Apply the service code, description and rate that actually fit the supply, not a generic rate copied from a prior transaction.
5. Check the documents before payment. Review the Mushak-6.3 tax invoice, the supplier’s registration position and any exemption or compliance evidence relevant to the exception claimed.
6. Complete the downstream process. Deduct, pay or adjust as required; issue Mushak-6.6 within the applicable timeframe; and retain the record trail.

The order is deliberate. A VAT invoice is evidence of the supplier’s transaction, but it does not by itself answer whether the recipient has a current VDS obligation. Conversely, failure to receive the required invoice does not create an automatic right to disregard VAT controls. The Act says that, except for First Schedule supplies, a withholding entity must not receive a supply or pay its price where the supplier is unregistered or unenlisted and does not issue a tax invoice. The proviso places responsibility for applicable VAT on the recipient where it receives a supply from an unregistered or unenlisted person, where applicable. [1] [2]

Do not use the historic BDT 10,000 or one-third rule as the current test

Older NBR explanatory material describes source withholding on supplies above BDT 10,000 and refers to withholding up to one-third of applicable VAT. That reflected an earlier form of section 49 and historic administrative material. The current consolidated Act instead refers to the determined VAT in the prescribed manner, and the 2025 Rules contain express, supply-specific deduction rates. The current Rules also replaced the 2021 source-deduction rules from 1 July 2025. [1] [2] [7]

That does not make historic materials irrelevant as background, but it does make them unsafe as a current rate card or threshold checklist. Organisations should validate current law against the 2025 Rules and the 2026 amendment before approving a payment.

Current deduction rates and supply classification

The 2025 Rules contain a service table that must be read with the definitions and exceptions in the same instrument. The table now includes 45 entries because the 2026 amendment inserted semiconductor assembly, testing and packaging services at 15%. The amendment took effect on 1 July 2026. [2] [3]

Many scheduled services carry a 15% VDS rate. Examples include AC hotels, bakers and caterers, dockyards, advertising agencies, printing presses, auctioneers, indenting houses, freight forwarders, community centres, survey firms, plant and capital-machinery rental, courier and express mail, consultancy and supervisory firms, audit and accounting firms, security services, several broadcasting and advertising categories, architectural and interior-design services, graphic design, engineering firms, sound and lighting equipment rental, board meeting attendance, chartered aircraft or helicopter rental, immigration advisers, event organisers, human-resource supply and management, other miscellaneous services, sponsorship services, credit-rating agencies and the newly added semiconductor service. [2] [3]

Other entries have different prescribed rates. The following illustrations show why classifying the actual supply matters:

• Non-AC hotels are listed at 10%, while qualifying restaurant services are listed at 5%.
• Motor vehicle garages and workshops are listed at 10%.
• Construction organisations are listed at 10%.
• Land-development organisations are listed at 2%.
• Building-construction organisations have rates tied to floor area or re-registration: 2% up to 1,600 square feet, 4.5% above that area, and 2% for re-registration of any size.
• Furniture marketing centres are subject to distinct 7.5% treatments, subject to stated production-stage VAT conditions.
• Procurement providers are listed at 10%.
• Transport contractors are listed at 5% for petroleum products and 15% for other goods.
• Information-technology-enabled services are listed at 5%. [2]

These are examples, not a substitute for the complete table. A rate should never be selected merely because a supplier is commonly described as a “consultant”, “contractor” or “service provider”. The service code and statutory description matter. A mixed contract may combine distinct VAT outcomes. Rule 9 requires the components of a composite supply to be stated separately in the tender, quotation or bill, with each component subject to its applicable VDS rate. [2]

Procurement providers: a high-risk classification question

The procurement-provider rule has a deliberately wide effect. Under Rule 4, a person other than a manufacturer who makes a supply of goods or services to a withholding entity under a contract, tender, work order or otherwise is treated as a procurement provider, except where the relevant service has its own specific definition. The Rules then require deduction on procurement-provider services at 10%, unless an exception applies. [2]

The 2026 amendment added an important clarification: a trader that supplies goods through Mushak-6.3 after paying VAT at 15% is not to be treated as a procurement provider. [3] This should not be reduced to a label on the invoice. The buyer should assess what the supplier is actually doing, whether the 15% VAT condition and documentary requirements are met, and whether the supply falls under a service that has its own schedule entry.

Manufacturers and traders are treated differently under the exceptions, discussed below. The distinction can be commercially significant where goods are sourced to meet a tender or project requirement. Supplier questionnaires, sample invoices, BIN checks and a clear product-flow description can reduce the risk of treating a trader as a procurement provider, or vice versa, without adequate support.

Special source-collection situations

The Rules extend beyond ordinary local procurement. Where an unregistered person imports services from a non-resident person outside Bangladesh, the relevant bank must collect or deduct VAT at 15% when the service price is paid and account for it as an increasing adjustment in the relevant tax period. Where a registered person imports services, the importer pays VAT at 15% to the Treasury and provides the treasury challan copy to the bank; if that proof is absent or the VAT is underpaid, the bank collects or deducts the unpaid amount. [2]

The Rules also provide for 15% VAT collection in connection with government, semi-government, autonomous and local-authority licences, permits and registrations, and certain related revenue sharing, royalties, commissions, charges and fees. A recipient of space or premises must pay VAT at 15% on rent through the mechanism stated in the Rules; from 1 July 2026, the amendment applies that payment route to the recipient regardless of registration status. [2] [3]

These provisions show why a single accounts-payable rule is insufficient. Cross-border payments, licences, revenue shares and rents need their own VAT decision paths.

Exceptions and evidence that matter

Rule 5 lists cases in which source VAT is not to be deducted. The exceptions are specific and should be evidenced before they are applied. The principal categories are as follows.

First, no VDS is required when a manufacturer supplies goods that bear 15% VAT, a reduced VAT rate or a specified tax and issues Mushak-6.3 showing that rate or specified tax. Second, a trader supplying goods with Mushak-6.3 that shows 15% VAT may fall outside deduction, provided the trader gives the recipient the prescribed proof concerning the most recent fiscal year’s eVAT return filing or a VAT honour certificate. If that proof cannot be produced for a reasonable cause, the Rules contemplate a certificate from the relevant divisional officer instead. [2] [3]

Third, a service that is not listed in Rule 3’s service table is outside VDS where its provider supplies it through Mushak-6.3. This is a targeted exception. It does not mean a service invoice always defeats VDS. A listed service remains subject to its entry, and the invoice must be read alongside the service classification. [2]

Other stated exceptions include payment of bills for fuel oil, gas, WASA water, electricity, telephone and mobile telephone services; supplies listed in the First Schedule; zero-rated supplies under section 21 of the Act; particular certified invoices for advertising agencies and television or online broadcast programme suppliers; qualifying furniture-manufacturer invoices; certain fiscal receipts issued by EFD, SDC, PKI or POS systems that include the recipient’s name and BIN; and domestic medicine purchases from traders. [2]

The 2026 amendment added all supplies made by a registered start-up establishment to the Rule 5 exceptions. That addition took effect on 1 July 2026. It does not justify treating every technology-sector supplier as a start-up. The status must be established under the relevant VAT framework and supported in the transaction record. [3]

Evidence is part of the rule, not a filing nicety

Many VDS disputes begin as evidence failures. A business may have a commercially sensible reason for treating a supply as manufacturer-led, trader-led, exempt or zero-rated. Yet the exception may depend on a particular Mushak-6.3, a tax rate shown on it, an eVAT return-filing certificate, a VAT honour certificate, a revenue-officer certification, a fiscal receipt with purchaser details, or proof of an upstream deduction and Treasury deposit.

A robust file should connect the legal conclusion to the documents actually reviewed. A short internal note identifying the supplier, the service code or goods classification, the reason for the treatment, the invoice number and the proof retained can make an otherwise opaque payment decision auditable. Where proof is incomplete, the decision should be escalated before payment rather than reconciled retrospectively.

Invoices, certificates, returns and payment

The form sequence serves two functions: it shows what was supplied and it enables the supplier’s decreasing adjustment. The supplier must issue a Mushak-6.3 tax invoice when supplying goods or services. The supplier reports the supply value and VAT or specified tax in Part 3 of its Mushak-9.1 return. [2]

For a registered withholding entity or registered supply recipient, the Rules require the recipient to make an increasing adjustment for VAT withheld or collected in the return for the relevant tax period. The withholding entity must issue a source-deduction certificate in Mushak-6.6 in triplicate within three working days of filing that return: the original goes to the relevant VAT circle, one copy goes to the supplier and one is retained for five years. The current VAT Rules contain the same certificate structure and require the supplier to have issued Mushak-6.3. [2] [4]

Where the withholding entity or recipient is not VAT registered, it must deposit the source-deducted VAT to the Treasury within 15 days of paying the consideration. Within three working days thereafter, it issues Mushak-6.6 in triplicate, submits the original certificate and Treasury challan to the relevant VAT circle, gives a copy to the supplier and keeps a copy for five years. [2] [4]

The supplier’s entitlement follows the document. On receiving Mushak-6.6, the supplier may take a decreasing adjustment for the matching deducted VAT. The time limit is the tax period in which the payment against the supply is made or the following six tax periods. The Act and the Rules both make the withholding certificate a condition of that adjustment. [1] [2]

Payment timing and document ownership

An organisation should allocate ownership clearly. Procurement can collect supplier data and contracts. Accounts payable can stop payment where essential documents are absent. The VAT team can determine treatment and oversee return adjustments. Treasury or the person responsible for payment can ensure that deducted amounts reach the Treasury on time. The certificate should not be left as an informal supplier request after the payment cycle closes.

This is especially important when accounts officers settle bills for government or comparable bodies. The Rules state that the accounting officer performs the deduction and Treasury deposit where bill settlement falls to that officer, and then takes the relevant certificate action within the stated period. [2]

Projects, subcontractors and the limited first-tier rule

Project structures need separate attention because section 49(5) provides a focused safeguard against repeated VAT application in a particular service chain. Where VAT payable by a service recipient under a project has been collected or deducted at source at the time the service price or commission is paid and deposited to the Treasury, a service provider may appoint a subcontractor, agent or other service provider to perform part of that total service.

In that situation, VAT is not applicable only to the first subcontractor’s supply, provided documentary evidence is presented that applicable VAT on the same service was collected or deducted at the first stage and deposited to the Treasury. The provision expressly does not apply to the purchase of goods under the project. [1]

The boundaries are as important as the relief:

• it concerns a project service arrangement, not every downstream transaction;
• it depends on deduction or collection and Treasury deposit at the first stage;
• it depends on evidence covering the same service;
• it is limited to the first subcontractor; and
• it does not apply to project purchases of goods. [1]

A project team should therefore maintain a chain-of-evidence file rather than rely on a general statement that VAT was “already deducted”. It should identify the main service, the contract and payment at the first stage, the relevant VAT treatment, the Treasury evidence, the scope passed to the first subcontractor and the invoice trail. If the subcontractor’s supply contains goods, additional services or a materially different contractual scope, a separate VDS analysis may be needed.

The 2025 Rules separately require component pricing in tender documents, quotations and bills where a supply has multiple elements. This is useful in project work, where construction, installation, goods, management, maintenance, rental and design services may be bundled. Separating the components allows the applicable rate or exception to be tested for each one instead of forcing one treatment onto the whole contract. [2]

Risk allocation, interest and penalties

VDS is not a paperwork-only requirement. Section 49 provides that the withholding entity and supplier are jointly and severally liable for VAT withheld at source and its deposit to the Government Treasury. That statutory allocation is a reason to take supplier certificates and payment evidence seriously even where a contract says the supplier bears tax risk. [1]

Section 85(1A) addresses failures by a VAT withholding entity to deduct and deposit VAT where it has that obligation. The VAT, including interest under section 127, may be recovered from the withholding entity as if it were the supplier. In addition, for failure to deposit VAT deducted at source within the prescribed time, the Commissioner may impose a fine of up to BDT 25,000 on the withholding entity, the person responsible for deposit and the entity’s executive officer. [1]

The Act’s general interest provision imposes simple interest at 1% per month on late payable tax, subject to its terms. For arrears arising from VAT deduction at source, it states that simple interest at 2% every six months is payable on the tax amount. Interest is additional to any penalty or fine. [1]

The Act also specifies a BDT 10,000 penalty for non-compliance or irregularity in failing to issue a tax invoice, credit note, debit note or withholding certificate. Penalty exposure is fact-sensitive and statutory powers are not automatic outcomes. The sensible compliance response is to identify the failure promptly, preserve contemporaneous records and obtain focused professional review before a correction, disclosure or response is made. [1]

A practical control framework

An effective VDS programme is a series of modest controls applied consistently. The following framework is not a substitute for applying the legislation to a transaction, but it can improve the quality of that application.

1. Build a live vendor and entity profile

Record the supplier’s legal name, BIN, TIN where relevant, registration position, goods or service description, standard invoice form and claimed VAT treatment. For procurement-sensitive vendors, capture whether the supplier is a manufacturer, a trader or a procurement provider, and retain the evidence supporting that conclusion. Refresh the profile where contracts, product flows or tax treatment change.

2. Make classification a contract-stage activity

State the supplies and their prices separately in tender documents, work orders and contracts when there are multiple components. Ask early whether the supply falls under one of the Rule 3 service codes, whether Rule 4 may apply and whether an exemption will be claimed. Doing this after invoices are raised can create avoidable commercial disagreement and certificate delays.

3. Configure a payment hold for VDS-critical documents

A payment-control checklist can require Mushak-6.3, the applicable rate analysis and exception proof before release. The relevant evidence will vary: for example, a trader’s eVAT return-filing certificate or VAT honour certificate, a certified invoice, a fiscal receipt with buyer identifiers, or project-chain proof. The aim is not to create unnecessary friction. It is to ensure that an exception is proved at the same time it is used.

4. Reconcile three records, not one

Reconcile the contract or work order, Mushak-6.3 and the payment instruction. After deduction, reconcile the payment, Treasury evidence or return adjustment, Mushak-6.6 and the supplier’s acknowledgement. The certificate should reflect the supply actually paid and the VAT actually accounted for.

5. Monitor changes in the rules

The 2025 Rules replaced the prior 2021 rules, and the 2026 amendment changed the live framework, including a new scheduled semiconductor service, the trader clarification, registered-start-up exception and rent treatment. NBR’s official SRO register records both the 2025 source-deduction rules and the 2026 amendment. [3] [5]

6. Give project teams a separate escalation path

Projects involving a main contractor, first subcontractor, imported services, foreign payment, public authority or composite pricing should not be forced through a generic goods-purchase workflow. Their contracts and cash flows may require review before the first bill is certified, not after a downstream subcontractor asks for a certificate.

Where the facts are complex, early analysis can prevent a later mismatch between contract terms, VAT invoices, VDS certificates and returns. Organisations that would like to discuss the issues raised here can contact TRW.

Frequently asked questions