Condo developers hopeful of tax reprieve | Sunday Observer

Condo developers hopeful of tax reprieve

Sri Lanka’s condominium developers last week said, they are hopeful the government will not impose the 15% Value Added Tax (VAT) on existing condominiums but will be applicable only to the sale of condominiums commencing operations after April 1, 2018. Speaking to the Sunday Observer, Pravir Samarasinghe, Past President, Condominium Developers’ Association, Sri Lanka (CDASL), an affiliated trade body of the Ceylon Chamber of Commerce said, the Finance Ministry has recently confirmed to the Association in writing that they will consider their request following representations made by CDASL.

“The Finance Ministry has confirmed to us in writing that if the Sale and Purchase Agreement has been entered into before March 31, 2018, subsequent payments for those customers can be exempted from VAT. So we are hopeful that it will be the case when the amendment to the Act as proposed, is finally gazetted,” Samarasinghe, the Group Chief Executive Officer of Overseas Realty (Ceylon) PLC, said.

The removal of the current VAT exemption on the sale of condominium housing units was first proposed in the 2018 Budget presented by Finance Minister, Mangala Samaraweera. However, the Minister during subsequent debates on the Budget had suggested that VAT would not be imposed on apartments valued under Rs.10 million.

“The reason we made representations to reconsider the implementation of the VAT on condominium apartments was purely because, while there is a heavy demand and requirement for housing, affordability is the biggest issue for the people of all income segments,” Samarasinghe, an Executive Council member of CDASL, which represents the condominium developers, said.

He noted that the exemption granted through the VAT Amendment Act in October 2016 exempting the supply of condominiums from Value Added Tax had made apartments affordable and created the much-needed level playing field among different categories of condominium developments who were then subjected to different VAT regimes. However, with the reversal of the exemption in Budget 2018, the condominium developers will again be placed on the same uneven territory as witnessed prior to November 2016.

“The reason VAT was removed back in November 2016 was because, while Board of Investment Companies were liable to pay VAT, non-BOI approved companies did not have to pay VAT, strategic development industries did not have to pay VAT, and there was a total anomaly in the tax system. So, when we asked for a level playing field at the time, then VAT was removed,” Samarasinghe highlighted.

He pointed out that the reintroduction of VAT to apartments comes on the back of a number of other taxes thereby dealing a severe blow on the aspect of affordability.

“If you take the construction industry, of late, income tax was increased from 14% to 28%, Nation Building Tax was introduced at 2%, and there is Nation Building Tax for sub contractor supplies. All these had cost a push effect on the cost of construction and therefore, our main worry is affordability,” he said.

Meanwhile, another developer the Sunday Observer spoke to said, the reintroduction of VAT on condominium units will have a significant impact on the pricing of units as the VAT inputs that are now absorbed as a cost will be compounded by output VAT on sales from April 1, 2018. The re-imposition of VAT on existing projects will have a cascading effect on the prices of condominiums, the developer noted.

“As the input VAT has already been absorbed as a cost, this change could potentially result in the increase in the prices of apartments. This would also have an impact on the VAT deferment for input VAT during the project implementation period for projects that are still in their implementation phase,” the developer who did not wish to be quoted said.

Meanwhile, the new Inland Revenue Act, taking effect on April 1, 2018 has introduced a 10% Capital Gains Tax (CGT) on the ‘realization’ of investment assets. Accordingly, CGT, applicable solely on business property transfers will arise only if the net cost of the asset accrues a gain to the owner of the asset.

“The gain is calculated as the consideration received for the asset or liability exceeding the cost of the asset or liability at the time of realisation. However, in the case of any asset owned, gifted and/or acquired prior to April 1, 2018, the cost of the asset will include its value as at September 30, 2017,” experts on the subject, said.