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| VAT deduct at Source(VDS) |
How does VAT deduct at Source by the Supply receiver?
VAT Deduct at Source (VDS) in Bangladesh is a mechanism where the recipient of specific goods or services is legally obligated to deduct a certain percentage of VAT from the payment made to the supplier, and then remit this deducted VAT directly to the government treasury on the supplier's account.
Here's a breakdown of how VDS works for the supply receiver:
1.Identifying if VDS is Applicable:
- The supply receiver first needs to determine if the goods or services they are procuring are subject to VDS.
- VDS applies to particular supplier categories and specified goods and services, as detailed in the Value Added Tax and Supplementary Duty Act, 2012, and relevant Statutory Regulatory Orders (SROs) issued by the National Board of Revenue (NBR) in bangladesh
- Withholding Entities: Certain entities are mandated to deduct VAT at source, including:
Government and semi-government organizations.
- Autonomous bodies and state-owned enterprises
- Local authorities (Parishads, etc.)
- Non-government organizations (NGOs) that have received approval from either the NGO Affairs Bureau or the Directorate-General of Social Welfare are also mandated to deduct VAT at source
- Banks, insurance companies, and other financial institutions
- Educational institutions above the secondary level.
Limited companies.
- Entities whose annual turnover surpasses a specific limit (currently BDT 10 crore) are also required to deduct VAT at source.
- Types of Supplies: VDS applies to specific goods (often when supplied by a "procurement provider" or at reduced VAT rates) and a list of designated services (currently around 43 as per SRO 240).
2.Determining the Applicable VDS Rate:
· The VDS rate isn't a fixed 15%; it fluctuates based on the nature of the goods or service and the supplier's classification.
· For Goods:
- If goods are supplied by a manufacturer with a valid VAT Challan (Mushak-6.3) showing a 15% VAT rate, generally no VDS is required.
- If a trader (who stocks and sells) supplies goods with a VAT rate of 5% to a withholding entity, VDS is deducted at 7.5%, considering them a "procurement provider."
- If a procurement provider (who acquires and supplies without stocking) supplies goods, the VDS rate is usually 5% or 7.5% depending on the scenario.
- For goods with reduced VAT rates (below 15%), the total applicable VAT is usually deducted at source if the receiver is a withholding entity.
For Services:
- For a specific list of services (mentioned in relevant SROs), VDS is mandatory at the prescribed rate, regardless of whether the supplier provides a Mushak-6.3. These rates vary (e.g., 15% for AC hotels, 10% for motor garages, 7.5% for construction firms).
- For services not on this mandatory list, if the supplier provides a valid Mushak-6.3 showing a 15% VAT rate, generally no VDS is required. If no Mushak-6.3 is provided, VDS at the applicable rate (usually 15%) should be deducted.
3.Deducting VAT at the Time of Payment:
- The supply receiver calculates the amount of VAT to be deducted based on the taxable value of the supply and the applicable VDS rate.
- This VAT amount is then deducted from the payment to the supplier, who receives the invoice total less the withheld VDS.
4.Depositing the Deducted VAT to the Government Treasury in Bangladesh:
- The supply receiver (the withholding entity) is responsible for depositing the deducted VAT to the government treasury within a specified timeframe (usually 15 days from the date of payment).
- This deposit is made using a prescribed treasury challan.
5.Issuing a VAT Deduction Certificate (Mushak-6.6):
- Once the VAT is deposited, the withholding entity is obligated to provide the supplier with a VAT Deduction Certificate (Mushak-6.6).
- This certificate serves as proof that VAT has been deducted and deposited on behalf of the supplier.
Typically, the Mushak-6.6 is issued in triplicate: one copy for the supplier, one for the VAT circle office, and one for the withholding entity's own records. The withholding entity must furnish this certificate to the supplier within three working days following the VAT deposit.
6.Accounting and Record Keeping:
- The supply receiver must maintain proper records of all VAT deductions made and the corresponding payments and Mushak-6.6 issued.
Consequences of Non-Compliance:
- Failure to deduct VAT at source and deposit it to the government treasury can result in penalties and interest charges for the withholding entity.
- Both the withholding entity and the supplier can be held jointly and individually liable for the un-deducted or un-deposited VAT.
In summary, the supply receiver plays a crucial role in the VAT collection process by deducting VAT at source according to the specific rules and rates applicable to the transaction and ensuring its timely deposit to the government, along with providing the necessary certificate to the supplier. It's essential for supply receivers to stay updated on the latest VAT regulations and SROs to ensure compliance.