Written by Md Rakib Hassan — Income Tax Practitioner with 10+ years of tax compliance and audit experience across Bangladesh and the UK. Former accounts manager at a UK chartered accounting firm managing 1,000+ clients, with direct experience resolving multi-year tax audit disputes with HMRC and the NBR. Currently Finance Controller at a UK-based multinational tech group.
If you work in accounts payable, finance operations, or tax compliance in Bangladesh, getting TDS VDS wrong is not a small mistake — it is a legal liability. Whether you are processing a contractor payment, a supplier invoice, or a service bill, you are legally required to calculate and deduct the correct TDS (Tax Deducted at Source) and VDS (VAT Deduction at Source) before releasing funds.
This guide breaks down TDS VDS in Bangladesh in plain, practical language — covering the legal framework, who must deduct, what “base value” really means, how to handle the four types of bills you encounter in practice, and the key record-keeping obligations under the Income Tax Act 2023, VAT and Supplementary Duty Act 2012, and the Companies Act 1994.
You can download the full TDS VDS reference guide here. (Link to your PDF)
The Legal Framework You Must Know
Before calculating a single taka of TDS VDS, you need to understand which laws govern each deduction:
| Compliance Area | Governing Law | Key Reference |
|---|---|---|
| TDS (Income Tax) | Income Tax Act 2023 | Section 89, 90, 140, 141, 142 |
| TDS Rules | Withholding Tax Rules 2024 | SRO No. 161-Law/Income Tax-36/2024 |
| VDS (VAT) | VAT & SD Act 2012 | Section 49, 50 |
| VDS Rules 2025 | SRO No. 182-Law/2025/310-VAT | Dated 27 May 2025 |
| Record Keeping | ITA 2023, VAT Act, Companies Act | See below |
Important update for FY 2025–26: The VDS rules governing VAT deduction at source are now governed by the new SRO 182 dated 27 May 2025, which superseded the earlier SRO 240. This means your finance team must update its reference sheets immediately if still using the old SRO.
Who Must Deduct TDS and VDS?
Not every entity in Bangladesh is legally required to deduct TDS VDS — but the list of those who must is wide.
Withholding Entities for TDS (Section 140(3), ITA 2023)
You are a specified person required to deduct TDS if you are:
- Any company, firm, association, trust, or fund
- A Public-Private Partnership
- Any foreign contractor or enterprise operating in Bangladesh
- Any hospital, clinic, or diagnostic centre
- Any e-commerce platform with annual turnover exceeding BDT 1 crore
- Hotels, community centres, convention centres, and transport agencies with annual turnover exceeding BDT 1 crore
- Any person (other than a farmer) involved in producing or supplying tobacco products
Withholding Entities for VDS (SRO 182, 2025)
You are required to deduct VDS if you are:
- Any government ministry, department, or office
- A semi-public or autonomous body, state-owned enterprise, or local authority
- An NGO approved by the NGO Affairs Bureau or the Department of Social Services
- Any bank, insurance company, or similar financial institution
- Secondary or higher-level educational institutions
- A limited company
Practitioner’s Note: If you fall into either category above, non-deduction is not an option. Failure to deduct TDS or VDS attracts a TDS rate 50% higher than the applicable rate when payment is made in cash (Section 142, ITA 2023), plus interest and penalties from the NBR.
What Is “Base Value” and Why Does It Matter?
The single most misunderstood concept in TDS VDS practice in Bangladesh is the base value (ভিত্তিমূল্য). This is the figure on which your TDS rate is applied — and it is not always the bill amount.
Definition of Base Value
Under Section 89 of the Income Tax Act 2023, the base value is the highest of:
- The contract value
- The bill or invoice amount
- The actual payment
If the bill includes VAT (মূসকসহ), you must first deduct VAT from the bill amount to arrive at the base value. The TDS rate then applies to that VAT-excluded figure.
Formula:
Base Value = Bill Amount − VAT (when VAT is included in the bill) TDS = Base Value × Applicable Rate (Section 89, Rule 3)
This is a critical distinction that trips up even experienced finance teams. Let us walk through all four bill types you will face in practice.
The Four Bill Types in TDS VDS Practice
In day-to-day accounts payable work in Bangladesh, you will encounter four configurations of VAT and Tax on supplier bills. Each requires a different calculation approach.
Bill Type 1: VAT Inclusive & Tax Inclusive
When the bill says: “Tax & VAT Inclusive” or “VAT & Tax as per Government Rule”
This means the final bill amount already includes VAT. The final consumer bears the VAT and the supplier is responsible for the tax.
Calculation — Step by Step:
Assume Bill Amount = BDT 61,800 | VAT Rate = 7.5% | TDS Rate = 3% (Section 89, Rule 3)
Step 1 — Calculate VAT (backwards from inclusive bill):
VAT = Bill Amount × 7.5 / 107.5 VAT = 61,800 × 7.5 / 107.5 = BDT 4,312
Step 2 — Calculate Base Value:
Base Value = Bill Amount − VAT Base Value = 61,800 − 4,312 = BDT 57,488
Step 3 — Calculate TDS:
TDS = Base Value × Rate TDS = 57,488 × 3% = BDT 1,725
Step 4 — Calculate Payment to Supplier:
Payment = Base Value − TDS Payment = 57,488 − 1,725 = BDT 55,763
Bill Type 2: VAT Exclusive & Tax Inclusive
When the bill says: “VAT Exclusive & Tax Inclusive”
Here the bill amount equals the base value directly. VAT will be added on top — the consumer bears VAT separately, but the supplier is covered for tax.
Calculation — Step by Step:
Assume Bill Amount = BDT 98,000 | VAT Rate = 7.5% | TDS Rate = 3%
Step 1 — Bill Amount = Base Value:
Base Value = BDT 98,000
Step 2 — Calculate VAT directly on Base Value:
VAT = 98,000 × 7.5% = BDT 7,350
Step 3 — Calculate TDS:
TDS = 98,000 × 3% = BDT 2,940
Step 4 — Calculate Payment:
Payment = Base Value − TDS Payment = 98,000 − 2,940 = BDT 95,060
Bill Type 3: VAT Exclusive & Tax Exclusive
When the bill says: “Tax & VAT Exclusive”
This is the most complex case. Here, bill amount equals payment amount — the company agrees to bear both VAT and Tax on behalf of the supplier. This requires the gross up method under Section 141 of the ITA 2023.
Calculation — Step by Step:
Assume Payment Amount = BDT 98,000 | TDS Rate = 3%
Step 1 — Calculate TDS on Gross Up Method (Section 141):
TDS = Payment × Tax Rate / (100 − Tax Rate) TDS = 98,000 × 3 / 97 = BDT 3,031
Step 2 — Calculate Base Value:
Base Value = Payment Amount + TDS Base Value = 98,000 + 3,031 = BDT 101,031
Alternatively: Base Value = Payment × 100 / (100 − Tax Rate) = 98,000 × 100 / 97 = BDT 101,031 ✓
Step 3 — Calculate VAT on Gross Up Method:
VAT = Base Value × 7.5% VAT = 101,031 × 7.5% = BDT 7,577
Step 4 — Actual Bill Amount:
Actual Bill = Base Value + VAT Actual Bill = 101,031 + 7,577 = BDT 108,608
Bill Type 4: VAT Inclusive & Tax Exclusive (Rare — Conflicted Bill)
When the bill says: “VAT Inclusive & Tax Exclusive” — this type arises from supplier ignorance of the law and is internally contradictory.
The practical resolution: contact the supplier and request they reissue the bill as either Type 1 or Type 2. If they refuse, treat both VAT and Tax as inclusive. Do not proceed with this bill configuration as-is — the base value calculation will differ depending on which deduction you run first.
Practitioner’s Note: In my experience managing over 1,000 client accounts, Bill Type 4 is often how VAT audit disputes begin. Flag these immediately, document your decision, and ask the supplier to clarify. Never guess.
TDS Rates You Must Know for FY 2025–26
TDS VDS rates in Bangladesh are set annually. The TDS rates for FY 2025–26 continue under SRO No. 161-Law/Income Tax-36/2024 (with applicable Finance Ordinance 2025 amendments). Key rates under Section 89 (Rule 3) for supply/services include:
| Base Value Slab | TDS Rate |
|---|---|
| Up to BDT 50 Lac | 3% |
| BDT 50 Lac to BDT 2 Crore | 5% |
| Above BDT 2 Crore | 7% |
Other frequently used Section 91 rates (services):
| Service Category | TDS Rate |
|---|---|
| Consultancy / Advisory | 10% |
| Professional / Technical Services | 10% |
| Rent (property/hotel) | 5% |
| Royalties / Intangibles (up to BDT 25 Lac) | 10% |
| Royalties / Intangibles (above BDT 25 Lac) | 12% |
| Advertising (newspaper, TV, web) | 5% |
| Transport / Carrying Service | 5% |
| Interest on savings | 10% |
| Dividend (resident with TIN) | 10% |
| Dividend (resident without TIN) | 15% |
Critical compliance rule — Section 142, ITA 2023: If a supplier cannot provide proof of tax return submission (PSR) at the time of payment, the applicable TDS rate increases by 50%. Similarly, if payment is made in cash rather than through banking channels, the rate again increases by 50%.
VDS: When You Must Deduct and When You Must Not
VDS under the updated SRO 182 (May 2025) applies to specific services. Here are the situations where VDS is not required — a list that your accounts team must memorise:
- Supplier provides a Mushak 6.3 (VAT Invoice) at 15% rate — No VDS deduction required, provided the supplier submits regular VAT returns via IVAS and presents proof
- Utility services — Fuel, gas, water (WASA), electricity, telephone, and mobile bills are exempt from VDS
- Services listed in the First Schedule of the VAT Act — Zero-rated and VAT-exempt supplies carry no VDS obligation
- Locally manufactured medicines purchased from a trader — No VDS required (Rule 5, SRO 182/2025)
- Electronic Fiscal Device (EFD)/Sales Data Controller (SDC) receipts — Where name and registration of recipient appear on the receipt, no VDS deduction is required
- Producers at 15% rate with valid Mushak 6.3 — No VDS deduction applies
Important: VDS deduction that is made but not deposited to the government treasury within 3 working days of filing the VAT return can attract a personal penalty of BDT 25,000 on the deducting officer, the person responsible for deposit, and the CEO of the entity.
Record Keeping: How Long Must You Preserve These Documents?
This is an area where many businesses in Bangladesh are found non-compliant during audits. The mandatory document preservation periods under Bangladeshi law are:
| Law | Section | Preservation Period |
|---|---|---|
| Income Tax Act 2023 | Section 179 | 3 Years |
| VAT Act 2012 | Section 107 | 5 Years |
| Companies Act 1994 | Section 181 | 12 Years |
The Companies Act requirement is the strictest. Section 181(5) requires that books of account for a period of not less than twelve years immediately preceding the current year, together with vouchers relevant to any entries in those books, must be preserved in good order. If your company is less than twelve years old, you must preserve records for the entire period since incorporation.
For tax purposes specifically, under Section 179 of the ITA 2023, the Deputy Commissioner of Taxes can require you to produce books, records, bills, vouchers, and electronic records for up to 3 years prior to the current assessment year.
Best practice: Align your internal document retention policy to the strictest requirement — 12 years under the Companies Act — so you are never caught short in any audit.
Common TDS VDS Mistakes That Attract NBR Scrutiny
Based on direct experience resolving tax audit disputes with the NBR, here are the errors that most frequently trigger enquiries:
- Applying TDS to the full bill amount when VAT is included. The correct base is always VAT-exclusive. Overpaying TDS creates a reconciliation problem; underpaying creates a liability.
- Using the old SRO 240 for VDS after May 2025. The new SRO 182 (May 2025) is now the governing regulation. Rates and conditions have been updated — always verify against the current SRO.
- Not grossing up when the contract says “Tax Exclusive.” Bill Type 3 requires the gross up formula under Section 141. Applying a straight percentage to the payment amount is incorrect and understates TDS.
- Failing to issue Mushak 6.6 certificates to suppliers. The VDS certificate (Mushak 6.6) must be issued to the supplier within 3 working days of depositing the VDS. Without this, the supplier cannot claim the credit — creating a dispute.
- Cash payments above BDT 500,000. Under the ITA 2023, transactions above this threshold must go through banking channels. Cash payments trigger the 50% TDS surcharge under Section 142.
- Missing the PSR check. At the time of payment, every withholding entity must verify that the payee has filed their income tax return (Proof of Submission of Return). No PSR means +50% on TDS rate.
Quick Reference: TDS VDS Calculation Decision Tree
When a supplier bill arrives at your desk, ask yourself these four questions in order:
Q1: Are you a specified withholding entity? → Yes → Proceed | No → No deduction required
Q2: Does the bill include VAT? → Yes → Deduct VAT first (using 7.5/107.5 formula) to get base value → No → Bill amount = base value
Q3: Is VAT deduction (VDS) applicable under SRO 182? → Check the 43-service list in the SRO | Supplier has Mushak 6.3 at 15%? → No VDS required
Q4: Does the contract say “Tax Exclusive”? → Yes → Use gross up formula (Section 141): Base Value = Payment × 100 / (100 − Rate) → No → Base Value × Rate = TDS
Frequently Asked Questions
Q: What is the difference between TDS and VDS in Bangladesh? TDS (Tax Deducted at Source) is income tax withheld under the Income Tax Act 2023 and deposited to the NBR. VDS (VAT Deduction at Source) is value added tax withheld under the VAT Act 2012, governed by SRO 182 (2025). Both apply simultaneously on most payments — they operate independently of each other.
Q: What happens if I forget to deduct TDS VDS? Under Section 142 of the ITA 2023, failure to deduct TDS means the withholding entity bears the tax liability. Interest and penalties apply. For VDS, the tax can be recovered at 2% interest, and a personal penalty of BDT 25,000 may apply to responsible officers.
Q: Is TDS deducted at invoice date or payment date? TDS is deducted at the time of payment, not when the invoice is recorded. This is a critical distinction — in your accounts payable workflow, TDS calculation should be a payment-stage step, not an invoice-stage step.
Q: What is the Mushak 6.6 form? Mushak 6.6 is the VDS certificate that the withholding entity (buyer) must issue to the supplier confirming the amount of VAT deducted at source. The supplier uses this to claim a decreasing adjustment in their VAT return. It must be issued within 3 working days of filing the relevant VAT return.
Q: How do I verify a supplier’s VAT registration (BIN)? You can verify a supplier’s BIN (Business Identification Number) through the NBR’s IVAS (Integrated VAT Administration System) portal. Always collect the supplier’s BIN certificate (Mushak 2.3) before processing any invoice where VDS may apply.
This article is for general guidance only and does not constitute professional tax or legal advice. Tax regulations, SRO references, and rates are subject to change. Always verify against the latest NBR notifications and consult a qualified tax practitioner for advice specific to your situation.
You can download the full TDS VDS Base Value reference guide with worked examples here.
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