Tax

Withholding VAT – all about VAT Deducted at Source (step by step)

July 25, 2020
Withholding VAT

A new SRO 149 dated 11 June 2020 has been issued where withholding VAT has been clarified in details like who are withholding entity, where withholding VAT is applicable or not and manners of payment etc. This SRO is very important to comply the VAT deducted at source (VDS).

Today in this article, I will discuss with you step by step all the areas about VDS. We have also an online course where we have discussed in details about VDS and discussed how to prepare Mushak-6.3, Mushak-6.6 and treasury challan in excel soft copy.

So, let’s start!

Withholding entity

Who are withholding entity is specified at the beginning of the SRO, you may also know that definition section of the Value Added Tax and Supplementary Duty Act 2012 has mentioned the name of withholding entity.

During the payment for the services and goods received shall withhold VAT at source at applicable rates or specified amount otherwise shall face penalty.

Following are the withholding entity who shall deduct VAT at source and deposited to the government treasury:

  • Any government or it’s ministry, department or office;
  • Local authority, parishad or similar organization;
  • NGO approved by NGOAB or Social Welfare department;
  • Any bank, insurance company or similar financial institute;
  • Secondary or higher educational institute;
  • Any limited company

Where withholding VAT is applicable

So, now we know who are the withholding entity but now we shall know where the withholding VAT is applicable.

You may know that there are four rates in VAT. 15% is the standard rate and other three rates are reduced rates which are 10%, 7.5% and 5%. Besides the above rates there are also specified amount under Third Schedule of VAT and SD Act 2012.

The reduced rate or tax amount specified as per Third Schedule is applicable for withholding VAT. So, when you will payment against the goods and services under Third Schedule you have to deduct VAT at source following the specified VAT rates or specified amount.

The list is long.

Don’t worry.

I have composed the full Third Schedule where you will get all the reduced VAT rates 2020-21 including H. S. Code. Downloadable PDF copy is also available in the article.

If any person participates in tender, contract, work order or any way to provide specified services mentioned in this SRO then VAT shall be deducted at source. The SRO 149 has mentioned total 43 services where the services applicable for VAT at 15% is also included. But generally, we know that VAT at source shall not be deducted at source where the VAT rate is 15%. So, here we are facing few exceptions. We will also get exceptions further in this article.

I have included the total 43 services including rates and service code below in annexure 01.

Any service received from non-resident person out-side Bangladesh shall pay VAT at 15% by the unregistered person during payment by the Bank and the deducted VAT shall be deposited by the Bank to their Commissionerate where they registered.

If the VAT at 15% has been deposited by the registered person and submitted the treasury challan to the Bank then the bank shall pay the amount without deducting VAT to the non-resident person. But if no VAT or VAT deducted at reduced rate then the full VAT or reduced VAT shall be collected during the time of payment.

VAT at 15% shall be collected during issuing or renewal of any license issue or renewal for services by the government, semi-government, statutory organization and local authority to service recipient. Moreover, VAT shall be collected at 15% on full amount of revenue sharing, royalty, commission, charge, fee or amount received in any way according to license, registration, permission etc.  

There is also another exception and it is rent. In this case, VAT at 15% shall be collected by the tenant during payment of rent.

Withholding VAT on procurement provider

A details explanation has been included in the SRO 149 for procurement provider. Here, procurement provider is considered as services as he is only providing the goods to the receiver after getting the work order or contract. Yes, it will create the confusion with trader.

Procurement provider means any person, institute or organization who supply any goods or services except exempted by participating quotation or tender or work order on any way to any ministry, department or office, semi-government or statutory organization, state owned organization, local authority, parishad or similar type of organization, NGO approved by the NGOAB or social welfare department, any bank, insurance or financial institute, secondary or higher educational institute and any limited company.

All person except registered manufacturer, service provider and businessman purchased any goods and services not exempted specified under First Schedule from importer, manufacturer, trader or service provider to sell withholding entity shall be treated as procurement provider.

The services which have specified definition shall not be treated as procurement provider.

Exempted goods and services by SRO provided by the procurement provider shall be withholding VAT to the receiver of services. However, if the procurement provider treated as exempted services in the SRO shall be out of the withholding VAT.

VAT payment at reduced rates on goods according to Third Schedule shall be considered for withholding VAT of procurement provider.

Where the withholding VAT is not applicable

In above we have discussed where the VAT is applicable at source, now we will discuss where the VAT is not applicable.

Any goods supplied mentioning the VAT at 15% on goods including Mushak 6.3, any services except mentioned in the SRO 149 dated 11 June 2020, mentioning the VAT at 15% including issuing Mushak 6.3 and any payment of bill for fuel, gas, water (WASA), electricity, telephone, mobile phone services.

We know that goods and services under First Schedule of VAT and SD Act 2012 are exempted from VAT. So, VAT shall not be applicable during the payment against those goods and services. The list of VAT exempted good and services under First Schedule is also long.

You will be happy to know that I have also composed the full First Schedule in this blog where you will get VAT exempted goods and services 2020-21 including H. S. Code. Downloadable PDF copy is also available in the post.

And any zero-rated supply as per section 21 of Value Added Tax and Supplementary Duty Act 2012 is also not applicable to deduct VAT at source. You may know that export related goods and services enjoyed the zero-rated facilities.  

Responsibilities of withholding entity

The first and most important responsibilities of withholding entity is that if a combined tax invoice (Mushak 6.3) is not issued, the withholding entity shall not receive any supply from such supplier and shall not pay no price against such supply to the supplier.

After deducting VAT at source, withholding entity or supply receiver shall deposit VAT at prescribed manner within 15 days of invoice payment and shall issue Mushak 6.6 within 03 working days; main copy to the respective Mushak circle, one copy to the supplier and another copy shall retain for 5 years by the withholding entity.

If the withholding entity fail to comply the above responsibilities then he shall face penalty as per VAT and SD Act 2012. In below, we will discuss the penalty for non-compliance of withholding VAT.

Supplier responsibilities

Supplier has also the responsibility and his first responsibility is that he shall issue Mushak 6.3 during supply. The deducted VAT shall mention in the Mushak 9.1 and shall make a decreasing adjustment subject to the received of Mushak 6.6 from withholding certificate.

Supplier shall entitle to adjust within 06 months after the month of VAT payment and the amount shall be lapse if fails to adjust within such period.

Interest, penalty etc.

Both supplier and withholding entity shall be liable for the VAT withhold and deposit to the government treasury.

Responsible person for VAT withholding shall be liable to pay interest 1t 2% half-yearly as he is the supplier of goods or services.

VAT withhold but not deposited to the government treasury then the VAT Commissioner may charge penalty not exceeding BDT 25,000 personally. Based on this article, a video has been prepared which discussed in very short time, is embedded below for you.

Annexure 1: Services applicable to VAT withhold

SI

Service Code

Description

Rate

01

S001.10

AC Hotel

15%

S001.20

AC Restaurant

15%

S001.10

Non-AC Hotel

7.5%

S001.20

Non-AC Restaurant

7.5%

02

S002.00

Decorators and Caterers

15%

03

S003.10

Motor Car Garage and Workshop

10%

04

S003.20

Dockyard

10%

05

S004.00

Construction Firm

7.5%

06

S007.00

Advertising Firm

15%

07

S008.10

Printing

10%

08

S009.00

Auctioneer

10%

09

S010.10

Land Development Company

2%

10

S010.20

Real Estate Company:

1-1,600 sqf

2%

More than 1,601 sqf

4.5%

Re-registration

2%

11

S014.00

Indenting Firm

5%

12

S015.10

Freight Forward

15%

13

S020.00

Surveyor

15%

14

S021.00

Plant or Capital Machinery Rental Firm

15%

15

S024.00

Furniture Showroom:

Manufacturing stage

7.5%

Showroom (VAT paid at 7.5% at manufacturing stage subject to the tax challan, otherwise 15%)

7.5%

16

S028.00

Courier and Express Mail Service

15%

17

S031.00

Repairing or servicing of taxable goods by any person, company or firm

10%

18

S032.00

Consultancy Firm and Supervisory Firm

15%

19

S033.00

Lease

15%

20

S034.00

Audit and Accounting Firm

15%

21

S037.00

Procurement Provider

7.5%

22

S040.00

Security Service

10%

23

S043.00

Television and Online Broadcasting Program Supplier

15%

24

S045.00

Law Firm

15%

25

S048.00

Transport Contractor:

Transportation of Petroleum

5%

Any other Transportation

10%

26

S049.00

Rent-A-Car

15%

27

S050.10

Architect, Interior Designer or Interior Decorator

15%

28

S050.20

Graphic Designer

15%

29

S051.00

Engineering Firm

15%

30

S052.00

Sound and Lighting Rent

15%

31

S053.00

Participating Board Meeting

10%

32

S054.00

Advertisement Broadcasting through Satellite Channel

15%

33

S058.00

Chartered Plan or Aeroplan

15%

34

S060.00

Purchase goods Participating Auction

7.5%

35

S065.00

Building, floor or space cleaning and maintenance Firm

10%

36

S066.00

Seller of Ticket of Lottery

10%

37

S067.00

Immigration Advisor

15%

38

S071.00

Event Organizer

15%

39

S072.00

Manpower Supplier

15%

40

S099.10

Information Technology Enabled Services

5%

41

S099.20

Other related services

15%

42

S099.30

Sponsorship Services

15%

43

S099.50

Credit Rating Agency

7.5%

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