A registered person can adjust the VAT paid on purchases and imports against the VAT charged on its own supplies which is referred to as an input tax rebate. Without this rebate, VAT would effectively be charged on VAT at each stage causing the tax cost to accumulate throughout the supply chain.

The right to a rebate depends on strict conditions. It has to be claimed in the correct period, supported by correct documents and recorded in the prescribed registers. This knowledge base covers what counts as input tax when a rebate can and cannot be claimed, how partial credit works and the documents that support the whole process.

What Is Input Tax?

What Counts as an "Input"

The meaning of "input" depends on the business.

Manufacturers and service providers: Inputs include raw materials, fuel, packaging materials, laboratory materials and equipment, machinery and machine parts and services used for the business.

Traders: Inputs are any goods or services imported or purchased for sale, exchange or transfer in the course of business.

What Is Not an Input

The following are not treated as inputs, so VAT paid on them cannot be claimed:

• Land, buildings, office equipment and fixtures and expenses for building construction, expansion, modernisation, repair or renovation;
• Furniture, office supplies, stationery, refrigerators, freezers, air conditioners, fans, lighting equipment, generators and their repair costs;
• Interior design, architectural planning and drawing services;
• Purchase, rent or lease of vehicles;
• Travel, entertainment, employee welfare, development work and related goods or services;
• Rent of offices, business premises, showrooms or similar places.

The common thread is that these are items of business infrastructure or general consumption, not direct inputs to taxable supplies. The VAT on them is a cost to the business.

Input Tax Rebate: When It Can Be Claimed

Under Section 46 of the VAT & SD Act 2012, input tax can be claimed as a rebate through the VAT return in the current tax period or the six tax periods that follow. If it is not claimed within that window, it is lost.

When the Rebate Is Not Allowed

Section 46 lists the cases where input tax cannot be claimed even if VAT was paid. In practice, most rebate disallowances found in VAT audits fall under this list.

Payment and Documentation Failures

• Payments over Tk 100,000 made outside the banking channel. Payment must go through a bank or a mobile financial service (MFS) platform. Transactions between associate enterprises are excepted.
• Inputs not recorded in the statutory registers. The purchase must be entered in Mushak 6.1 (Purchase Register) and Mushak 6.2.1 (Purchase-Sale Register) as prescribed by the Rules.
• Incomplete tax invoice. The Mushak 6.3 must show the name, address and BIN of both the customer and the supplier.
• Incomplete importer's tax invoice. The importer's Mushak 6.3 must carry the goods declaration number and its goods description must match the goods declaration.

Timing Failures

• Rebate not taken on time. Credit is lost if it is not claimed in the tax period of purchase or import or within the six tax periods that follow.
• Goods released against a bank guarantee. Input tax on goods or raw materials released against a bank guarantee cannot be claimed until the guarantee is finally settled. It may then be claimed within the next six tax periods, counted from the later of the release of the bank guarantee or the final payment of duties and taxes.

Imported Services

Imported services where the output side is missing. No rebate is allowed if the importer has not shown the output tax on the imported service in its VAT return, as required by Section 20.

Nature of the Supply

• Inputs used for exempt goods or services.
• Inputs used for supplies taxed below 15% (other than exports) or at a fixed VAT.
• Turnover tax and supplementary duty paid. Neither is creditable.
• Goods held by another person. VAT paid on goods in the custody or possession of another person cannot be claimed, except in contract manufacturing.
• Sales below input value. If goods or services are supplied at a price lower than the input value, input tax exceeding the output tax payable is not allowed.

Input-Output Coefficient Failures

• Expenses not shown in the Mushak 4.3 input-output coefficient declaration. This applies except for sectors prescribed by the NBR and for supplies of services.
• Cost increases without a revised coefficient. An additional input tax of 7.5% is disallowed if the total cost of inputs rises by more than 7.5% and a revised Mushak 4.3 is not submitted.
• Inputs in the Mushak 4.3.1 declaration. No rebate is allowed on inputs declared in Mushak 4.3.1 under Section 32(6) of the Act, read with Rule 21(2) of the VAT & SD Rules 2016.

Restricted Expenses

• Passenger vehicles and entertainment services. VAT on these is generally blocked. It may be allowed where the purchases are part of the person's normal course of economic activities, for example a car rental or event management business.
• Club and association membership. Expenses for membership of a club, association or society of a sporting, social or recreational nature are not creditable.

Practical point: A monthly reconciliation of the purchase register against the 6.3 invoices and bank statements prevents most of the problems in items 1 to 4. These failures are simple to prevent and costly to find during an audit.

Partial input tax credit can be claimed for the portion of inputs consumed in a tax period for taxable supplies.

For businesses with mixed supplies, where a VAT-registered entity makes standard-rated or reduced-rated or specific VAT supplies or exempt supplies or zero-rated supplies at the same time, it can take input tax credit only on its standard-rated and zero-rated supplies. The process has two steps:

1. The entity claims the entire input tax credit under Section 46.

2. Then, it makes increasing adjustments to reverse the credit relating to its reduced-rated, specific VAT or exempt supplies.

VAT Documentation Supporting the Rebate

• Purchase Register (Mushak 6.1) / Purchase-Sale Register (Mushak 6.2.1)
• Tax invoice (Mushak 6.3) / Bill of Entry (BOE)
• Input-output coefficient (Mushak 4.3)
• VAT return (Mushak 9.1)

Compliance Checklist

For a business claiming input tax rebates:

• Every purchase over Tk 1 lakh paid through a bank or MFS
• Every Mushak 6.3 shows the name, address and BIN of both parties
• Importer's Mushak 6.3 carries the goods declaration number, with a matching description
• All purchases entered in Mushak 6.1 and 6.2.1
• Rebate claimed within the current period or the six periods that follow
• Output VAT on imported services shown in the return (Section 20)
• Mushak 4.3 submitted 15 working days before first delivery and revised when input prices move more than 7.5%
• Increasing adjustments made after each period for exempt, reduced-rate or specific VAT supplies
• Mushak 4.4 or 4.5 filed for unusable or damaged stock with the rebate reversed
• Quarterly Mushak 9.1 filed within 15 days of quarter-end