Apartment VAT exemption to benefit nobody?

– Rs. 25 m threshold disqualifies urban condos

By Madhusha Thavapalakumar

The Government’s recent decision to exempt apartment units that are under Rs. 25 million from value-added tax (VAT) would not benefit Sri Lanka’s property sector in any meaningful way, The Sunday Morning Business understands.
According to Ministry of Finance sources, this is because all apartment units in a complex must be priced at or below Rs. 25 million to be eligible for this exemption, and even if one unit exceeds this threshold, the entire project becomes ineligible.
Therefore, this exemption, provided through a bill submitted to Parliament on 23 October by the Ministry of Finance, effectively excludes all urban and modern condominium complexes.
An official from a leading property group in Sri Lanka, which undertakes medium-scale apartment projects, told The Sunday Morning Business that almost all their apartment complexes come with penthouses which are obviously priced above Rs. 25 million.
Therefore, he believes this would only benefit a very few of their apartment projects which were commenced in the suburbs of Colombo around two to three years back, although even such is doubtful.
“Most of our suburban projects were begun two to three years back. At the time, they were booked for Rs. 10-15 million and that was the market value too. Buyers pay in an instalment basis. Now, after completion, when they go to the Department of Inland Revenue to register their property and pay Stamp Duty, the Department does their own valuation. Their valuation would be based on the current market price. The unit which was sold for Rs. 10-15 million would now be Rs. 25 million and above, in which case, the buyer would be subjected for VAT as well,” he noted.
Speaking further, the official noted that given the market value evaluation that will be done by the Department of Inland Revenue, the tax exemption would benefit only small apartment projects in the suburban or outstation areas.
The Sunday Morning Business spoke to Altair Director Pradeep Moraes who is also the Chairman of Condominium Developers Association of Sri Lanka (CDASL). Moraes welcomed the Government’s move to extend the value of units that will qualify for this exemption, even though luxury apartment projects like Altair will not benefit from this revision.
The 15% VAT on condominium sales was initially scheduled to be implemented from 1 April, but it has not been up to date due to bureaucratic delays. Under the initial plan, units of apartment projects valued under Rs. 15 million were exempted from VAT, which has now extended for up to Rs. 25 million, and the implementation date is yet to be announced.
In addition, the VAT is exempted if the agreement to sell, relating to such supply, is executed as per the Notaries Ordinance prior to the date of commencement of the VAT and for the supply of any condominium housing units which have been completed, and in respect of which, the Certificate of Conformity has been obtained from the relevant local authority prior to the date of commencement of VAT.
Further, the presented Bill says the VAT rate applicable on the supply of condominium housing units will be reduced to 6% and input tax relating to such supply will be counted at 5%, and these amendments would be taken up during the Committee Stage of the VAT Bill.
Moraes stated that this relief for construction supplies would be of marginal benefit for developers whose projects were nearing completion.
In addition to this, the Bill says that the supply of goods by the construction contractors to their overseas projects will be treated as exports.
The VAT has been imposed in accordance with the Government Gazette Value Added Tax (Amendment) Act No. 25 of 2018 issued in August 2018.
VAT on apartment sales was in effect before 2015, but was removed in the Budget 2015 and made a return in the Budget 2018. However, Minister of Finance Mangala Samaraweera deferred the tax for a year due to industry concerns and stated that it would be effective from April 2019, with sales and purchase agreements (SPA) signed before 1 April 2019 exempted.
Speaking to The Sunday Morning Business soon after the Budget 2019 was presented to Parliament, Moraes stated that many of the ongoing big projects in the country had neared completion of construction work and therefore, imposing VAT on these apartments was unreasonable.
“Projects for which permits have been obtained already and work is ongoing should be exempt from output VAT as all their contracts and pricing have been based on previously existing tariffs. Each development will be affected in different degrees depending on how much they have spent on the project and how much inventory is left,” he said.
In March, Chamber of Construction Industry (CCI) President Eng. Maj. Ranjith Gunatilleke noted this proposal would weaken apartment sales, which were already not fast-moving.
“Now, for some reason, apartment sales are not fast-moving. VAT is also being levied, so the prices of apartments will increase further and that situation may not encourage apartment sales,” he added.