Author: Shibli zaman | December 29, 2024

Value Added Tax (VAT) is an important part of the tax system in Bangladesh. It is a consumption tax that is levied on goods and services at each stage of production or distribution. For businesses, understanding how VAT works is crucial for legal compliance, proper bookkeeping, and financial planning. This guide will explain how to calculate VAT in Bangladesh, what businesses need to know, and the steps involved in VAT calculation.

What is VAT?

VAT is a tax imposed on the value added to goods and services at each stage of production or sale. Unlike sales tax, which is paid only at the point of sale to the final consumer, VAT is collected incrementally at each stage of the supply chain. Businesses must charge VAT on the goods and services they sell and pay VAT on the goods and services they purchase. The difference between these amounts is what the business remits to the National Board of Revenue (NBR) of Bangladesh.

Key Features of VAT in Bangladesh

VAT Rate in Bangladesh: In Bangladesh, the standard VAT rate is 15%. However, there are reduced rates and exemptions for certain goods and services. For instance, essential goods such as rice, vegetables, and some healthcare services are exempt or subject to a lower VAT rate.
VAT Registration: Businesses with an annual turnover exceeding a certain threshold are required to register for VAT. This is essential for those involved in importing goods or providing taxable services.
VAT on Importation: When goods are imported into Bangladesh, VAT is charged at the point of importation. The VAT is typically calculated based on the Customs value, plus any applicable customs duties, and other charges.
Input and Output VAT:
- Input VAT: This is the VAT paid by a business on goods or services purchased for business purposes.
- Output VAT: This is the VAT charged by a business on its sales of goods or services.

Steps to Calculate VAT in Bangladesh

Now that we understand the fundamentals of VAT, let’s dive into the step-by-step process of how VAT is calculated in Bangladesh.

Step 1: Determine the Applicable VAT Rate

The first step in calculating VAT is determining the applicable VAT rate. The standard VAT rate in Bangladesh is 15%, but certain goods and services may be taxed at different rates. For example, essential goods and services, like basic food items and healthcare, may have a reduced rate or be exempt from VAT.

Step 2: Identify the Value of the Goods or Services

The value of the goods or services is the basis for calculating VAT. In the case of goods, this is typically the sale price of the item. For services, it is the fee charged for the service provided. For VAT purposes, this value should include any other costs associated with the transaction, such as packaging, shipping, and insurance.

Goods: If you are selling goods, you need to establish the sale price of the goods.
Services: For services, the agreed-upon fee is used.

Step 3: Calculate Output VAT

Once you have determined the sale value, you can calculate the VAT to be charged to the customer. The formula for calculating output VAT is:

Output VAT=Sale Value×VAT Rate

For example, if you are selling an item worth BDT 10,000, and the VAT rate is 15%, the VAT amount would be:

Output VAT=10,000×15%=1,500BDT

Thus, the customer would pay BDT 11,500 (BDT 10,000 + BDT 1,500) for the item.

Step 4: Calculate Input VAT

Input VAT refers to the VAT a business pays when purchasing goods or services for its business operations. You can claim this back or offset it against your output VAT liability. The formula for input VAT is:

Input VAT=Purchase Price×VAT Rate

For example, if your business purchases raw materials worth BDT 5,000 and the VAT rate is 15%, the input VAT would be:

Input VAT=5,000×15%=750BDT

You will be able to recover this VAT, reducing the amount you owe to the NBR.

Step 5: Net VAT Payable

After calculating both input and output VAT, the next step is to determine the net VAT payable to the government. This is done by subtracting the input VAT (what you paid on purchases) from the output VAT (what you collected from customers). The formula is:

Net VAT Payable=Output VAT−Input VAT

If your output VAT exceeds your input VAT, you must pay the difference to the NBR. Conversely, if your input VAT exceeds your output VAT, you can claim a refund or carry forward the excess to the next VAT period.

Example:

Output VAT: BDT 1,500
Input VAT: BDT 750

Net VAT Payable=1,500−750=750BDT

Thus, in this case, the business would owe BDT 750 to the NBR.

Step 6: Filing VAT Returns

Businesses are required to file VAT returns with the NBR on a regular basis. The VAT return includes details of the VAT collected on sales (output VAT) and the VAT paid on purchases (input VAT), along with the net VAT payable. VAT returns are typically filed monthly or quarterly, depending on the nature of the business.

The key information required in the VAT return includes:

Sales and purchases details
VAT collected and paid
Net VAT payable or refundable

Step 7: Remitting VAT to the NBR

Once the VAT return is filed, the net VAT payable should be remitted to the NBR. The payment can be made through designated banks or through the online payment system provided by the NBR.

VAT Exemptions and Reduced Rates in Bangladesh

Not all goods and services are subject to the standard VAT rate. The Bangladesh VAT law provides certain exemptions and reduced rates for specific categories of goods and services:

Exempt Goods and Services:
- Basic food items like rice, pulses, and vegetables.
- Health and education services.
- Services provided by religious institutions.
Reduced VAT Rates:
Some goods and services are taxed at reduced rates (such as 7.5% or 5%) or may be fully exempted from VAT, depending on the economic and social context. Examples include agricultural products and certain educational services.

Common Mistakes to Avoid in VAT Calculation

Incorrect Classification of Goods/Services: Ensure that goods and services are classified correctly to apply the correct VAT rate.
Failing to Track Input VAT: Many businesses miss out on claiming input VAT on their purchases, which can lead to overpaying VAT.
Improper Documentation: Proper invoices, receipts, and records are essential for VAT reporting and claiming back VAT.
Failure to Register for VAT: If your turnover exceeds the VAT threshold, failing to register can lead to penalties.

Conclusion

Understanding how to calculate VAT is essential for every business operating in Bangladesh. By following the proper steps for VAT calculation, businesses can ensure compliance with the National Board of Revenue (NBR) and avoid costly mistakes. This guide provides a clear, step-by-step approach to VAT calculation, from identifying the applicable rate to filing VAT returns. If you are unsure about VAT or need help with VAT compliance, it’s always a good idea to consult with a professional accountant or tax advisor to ensure that your business remains compliant with Bangladeshi tax laws.

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How to Calculate VAT in Bangladesh: A Beginner’s Guide