Tax Deduction at Source (TDS) in Bangladesh — also known as withholding tax — is a mechanism where tax is deducted at the point of payment and remitted directly to the government by the payer, on behalf of the recipient. It ensures broader tax compliance, reduces revenue leakage, and brings major payments under fiscal visibility.
Table of Contents
Under the Income Tax Act, 2023 and Withholding Tax Rules, 2024, the TDS regime has been modernized, expanded, and made more rigorous for both residents and non-residents.
For any business operating in Bangladesh — local or multinational — understanding TDS is non-negotiable. Missteps lead to penalties, higher effective tax rates, and compliance risk.
Legal Framework & Authority
TDS in Bangladesh is governed by:
- Income Tax Act, 2023
- Withholding Tax Rules, 2024
- Guidelines, schedules, and circulars issued by the National Board of Revenue (NBR)
These provisions specify:
- Who must deduct TDS
- On which payments TDS applies
- TDS rates for different transaction categories
- Timeframes, certificates & reporting requirements
This legal structure makes TDS one of the fundamental compliance pillars for taxpayers in Bangladesh.
Why TDS Matters for Your Business
Businesses that ignore or misapply TDS face:
- Penalties and interest assessments
- Disallowance of expenses for failing to deduct
- Cash-flow issues from retroactive tax liabilities
- Audit or dispute escalations
Right deduction and timely compliance is not just tax compliance — it’s financial risk management.
TDS Applicability: Who Must Deduct
TDS must be deducted by:
- Companies and corporations
- Financial institutions
- Government agencies
- NGOs and development partners
- Employers and contractors
- Any person or entity making a specified payment
If your organization makes a payment covered under TDS provisions, you are liable to withhold and deposit tax, regardless of the recipient’s claims.
Payments & Transactions Subject to TDS
TDS applies to a wide array of payments in Bangladesh, including:
1. Salaries
Tax deducted at source based on applicable tax slabs; employers must withhold appropriate tax from employee pay.
2. Contract Payments & Supply of Goods
Including execution of contracts, supply of goods or manufacturing services.
3. Professional & Service Fees
Consultancies, tech services, creative services, marketing fees fall under TDS.
4. Interest & Financial Payments
Interest on savings accounts, fixed deposits, or other financial instruments.
5. Rent & Property-related Payments
Rental income and real estate-related transfers.
6. Dividends & Investment Payments
Withholding on dividends depends on whether the payee has a TIN.
7. Export/Import & Other Categories
Export subsidies, export proceeds, shipping freight, and other specialized payments are subject to specific TDS provisions.
Updated TDS Rates in Bangladesh (FY 2024–25 / Rules 2024)
The TDS regime now contains numerous categories each with a specific rate under the Income Tax Act 2023 and Withholding Tax Rules 2024. Major categories include:
| Payment / Category | Typical TDS Rate |
|---|---|
| Salaries | Average rate based on taxable income |
| Contract execution and supply of goods | Range varies (0.5%–7% or per annexure) |
| Professional services | 10% |
| Advertisement | 5% |
| Rental income | 5% |
| Dividends (resident with TIN) | 10% |
| Dividends (no TIN) | 15% |
| Bank interest (trust/company) | 20% |
| Interest on securities | 5% |
| Export proceeds | 1% |
| Local L/C payments | 1%–3% based on commodity type |
| Mobile operator payments | 20% |
| Real estate developer to land owner | 15% |
This illustrates a highly nuanced system where one size does not fit all — and accurate classification is essential.
Key TDS Compliance Rules You Must Know
► Payment or Credit — Whichever is Earlier
TDS must be deducted at the time of payment or when the amount is credited to the recipient’s account — whichever happens first.
► Deposit Timeline
After deduction, the TDS must be remitted to the government within the prescribed period (usually within two weeks).
► Issue Withholding Certificate
The deductor must issue a TDS certificate to the payee. This is crucial documentation for claiming credit when filing tax returns.
► Filing TDS Statements
Periodic reporting to the NBR is required, detailing all TDS amounts deducted and deposited.
Exceptions & Special Considerations
Not all payments attract TDS. Notable exclusions under the rules include:
- Payments to banks, insurance, financial and mobile financial service providers for their services are currently exempt from TDS under Rule 4 (2024).
- Purchases of petrol and CNG gas from fuel stations are also exempt.
Additionally, the TDS rate can increase by 50% if payment is made in cash or if the payee fails to provide required tax documentation (Proof of Submission of Return / PSR).
Penalties & Risks of Non-Compliance
Failing to deduct TDS, delay in deposit, or incorrect reporting exposes you to:
- Interest on unpaid TDS (often calculated monthly)
- Disallowance of expenses for failing to deduct
- Heavy monetary penalties
- Additional scrutiny in tax audits
- Potential reputational damage
Non-compliance is treated strictly by the NBR, and due diligence is essential.
How TDS Credits Work for Payees
Any tax deducted at source becomes a credit against the payee’s tax liability when filing annual returns. This means:
- Deducted amounts reduce total tax payable
- Payees must ensure certificates or correct records are obtained
- Reconciliation with tax returns prevents disputes
Without proper certificates, claiming credit becomes more complex — keep documents organized.
Common TDS Mistakes Businesses Make in Bangladesh
Despite clear legal provisions, many businesses in Bangladesh repeatedly make the same TDS mistakes, leading to penalties and unnecessary disputes with the NBR.
The most common errors include:
- Incorrect classification of payments
Businesses often apply the wrong TDS rate by misclassifying payments (e.g., treating professional services as general contracts). - Failure to deduct at the correct time
TDS must be deducted at the time of payment or credit, whichever is earlier. Delayed deduction is still a violation. - Non-deduction on advance payments
Advances are frequently ignored, but TDS may still apply depending on the nature of the transaction. - Ignoring increased rates for non-compliance
Failure to collect TIN, proof of return submission, or payment in cash can trigger higher TDS rates, which many businesses overlook. - Poor documentation and record-keeping
Missing certificates, challans, or reconciliation records make audits painful and risky.
These mistakes are not technical oversights — they are compliance failures that can be easily avoided with proper advisory support.
TDS on Payments to Non-Residents and Cross-Border Transactions
TDS becomes significantly more complex when non-residents or foreign entities are involved.
In cross-border payments, businesses must consider:
- Whether the payment constitutes Bangladesh-source income
- Applicability of Double Taxation Avoidance Agreements (DTAA)
- Permanent Establishment (PE) risk
- Nature of service (technical, consultancy, royalty, etc.)
- Gross vs net-of-tax payment structures
In many cases, TDS must still be deducted even if the service provider has no physical presence in Bangladesh, unless DTAA relief is properly applied.
Incorrect handling of non-resident TDS is one of the top triggers for tax audits and reassessments. This is an area where relying on internal accounts teams alone is risky.
Impact of TDS on Cash Flow and Business Planning
While TDS is ultimately adjustable against final tax liability, it has a direct cash-flow impact on both deductors and payees.
For payees:
- TDS reduces immediate cash receipts
- Delays in obtaining certificates can delay tax credit claims
- Excess TDS may remain stuck until return assessment
For businesses:
- Higher working capital requirements
- Additional administrative overhead
- Increased reconciliation and reporting workload
Strategic tax planning ensures TDS does not become a silent drain on liquidity. Well-structured contracts and payment terms can significantly reduce friction.
Role of Digital TDS Systems and e-Compliance in Bangladesh
Bangladesh’s tax system is steadily moving toward digitization, and TDS compliance is no exception.
Key developments include:
- Online challan generation
- Electronic TDS reporting
- Digital verification by NBR systems
- Cross-matching of TDS credits with returns
While digitization improves transparency, it also means errors are detected faster. Incorrect deductions, mismatches, or delays now surface quickly and lead to automated notices.
Businesses that modernize their TDS processes and align them with digital compliance standards gain a clear advantage in avoiding disputes.
Practical Tips for Businesses
1. Maintain a TDS Schedule Matrix
Map your payment types against current TDS schedules so you always know when withholding is required.
2. Link Vendor Records to TDS Obligations
Match your vendor master data and GL codes to the TDS rate matrix — automates compliance and prevents misses.
3. Get Expert Review Each Finance Act Update
Every fiscal year may change rates, exemptions, categories, and rules — expert tax counsel ensures you don’t get blindsided.
4. Use e-TDS Platforms
The NBR’s e-TDS system digitizes deposits and reporting, reducing error and saving time.
Frequently Asked Questions (FAQs)
Is TDS mandatory in Bangladesh?
Yes. Tax Deduction at Source in Bangladesh is mandatory for specified payments under the Income Tax Act.
Can TDS be adjusted against final tax liability?
Yes. The deducted amount can be adjusted when filing the annual income tax return.
What happens if TDS is deducted but not deposited?
Both penalties and interest apply, and the deductor remains fully liable.
Are foreign service providers subject to TDS?
Yes, unless exempted under a Double Taxation Avoidance Agreement (DTAA).
Can incorrect TDS deduction be corrected later?
Corrections are possible but often involve additional filings, approvals, and scrutiny.
Final Thoughts
Tax Deduction at Source (TDS) in Bangladesh is a complex, highly specific withholding framework that affects almost every major payment type in the economy — from salaries and services to exports and real estate.
For businesses and professionals operating in Bangladesh — especially those with cross-border structures — TDS compliance is not one more checkbox: it’s a core strategic and financial obligation.
At Dewey & LeBoeuf LLP, we provide comprehensive TDS advisory, compliance support, legal structuring, and dispute defense so you can operate confidently and compliantly in Bangladesh.
Book a consultation with Dewey & LeBoeuf LLP today to ensure your TDS compliance framework is accurate, defensible, and optimized for business success.
E-mail: info@deweyleboeuf.com
Phone: +971 58 690 9684
Address: 26B Street, Mirdif, Dubai, UAE