VDS explained: who deducts, how much, and what goes wrong
VAT deducted at source trips up more businesses than any other compliance requirement. Here is how it actually works.
The basic idea
For certain services, the party receiving the service must withhold part of the VAT and deposit it directly to the treasury, instead of paying the full amount to the supplier. The supplier then claims credit for the amount withheld.
This is VAT Deducted at Source, or VDS.
Who must deduct?
Not everyone. The obligation falls on specified withholding entities β government bodies, NGOs, banks and financial institutions, limited companies, and educational institutions, among others. A sole proprietorship buying the same service generally does not deduct.
How much?
It depends entirely on the service code. Some services carry a 15% VAT rate with the full 15% deducted at source; others carry a reduced rate with partial deduction. Our VDS calculator has the current schedule.
The three things that go wrong
1. Deducting when you should not. If you withhold VDS on a service that is not in the schedule, your supplier cannot claim the credit and you have created a dispute over money that is already with the treasury.
2. Not issuing Mushak 6.6. The certificate is what allows the supplier to claim credit. Without it they will chase you, and rightly so. Issue it within three working days of deduction.
3. Depositing late or under the wrong code. The challan must go to the correct economic code. A misposted challan is administratively painful to correct.
Practical advice
Build the check into your accounts payable process, not your month-end close. By the time you are closing the month, the payment has already gone out.
If you are handling a meaningful volume of withholding, get a VAT specialist involved. The cost of getting this wrong compounds monthly.