VAT on Condominium Units
One of the much discussed points in relation to the simple set of budget proposals presented in the Parliament, on the
9th November 2017 is the proposal to impose VAT on the sale of residential condominium units.
Prior to proceeding to analyze the budget proposal, few tax points in relation accommodation must be set out for the benefit of the readers.
Sale or Lease of commercial accommodation, both condominium and other accommodation attracts VAT
Leasing of residential accommodation, both condominium & other accommodation attracts VAT
At present sale of residential accommodation, both condominium & other residential accommodation is exempt from VAT The Budget Proposal 2018, is to impose VAT on supply of residential condominiums units with effect from 1st April 2018. Hence, sale residential accommodation which are not condominiums units and therefore not governed by the Apartment Ownership Act No 11 of 1973 will continue to be exempt from VAT.
The Budget proposal will be effective from the 1st of April 2018. Hence ‘supply’ of any residential condominium units prior to that date would not attract VAT. The VAT Act has stipulated a specific rule for ascertainment of the ‘Time of Supply’. Accordingly the earliest of the four incidences set out below would be considered as the time of supply in the eyes of the Law.
( a) the issue of an invoice by the supplier in respect of the goods/ service rendered; or
(b) a payment for the goods/services including any advance payment received by the supplier or for future services; or
(c) a payment for the goods/ services is due to the supplier in respect of such supply or for future services; or (d) the delivery of the goods have been effected/the service was performed.
The Act also contains a definition for the terms ‘supply of goods’ and ‘supply of service’ as follows.
“supply of goods” means the passing of exclusive ownership of goods to another as the owner of such goods or under the authority of any written law and includes the sale of goods by public auction, the transfer of goods under a hire purchase agreement, the sale of goods in satisfaction of a debt and the transfer of goods from a taxable activity to a non-taxable activity ;
“supply of services” means any supply which is not a supply of goods but includes any loss incurred in a taxable activity for which an indemnity is due;
At the 2nd reading on 16th November 2017of the Budget 2018 to accommodate the representations made by the stakeholders, the Government has decided that VAT will be applicable only on new Sales Agreements to be executed after 1st of April 2018 and Sales Agreements executed prior to April would not attract VAT. The Amending Act to be passed to amend the principal VAT Act in order to provide legal effect to the budget proposals would indicate the exact status in this regard.
The effect of an Exemption of a supply from VAT is that whilst the supplier is not permitted to charge VAT on his supply from the customer, he is also prohibited from claiming input VAT, I.e. VAT paid to the suppliers for purchasing goods and services utilized for making the VAT exempt supply. Thus once the supply of condominium units are made liable for VAT, the person could claim input VAT incurred from the date of the imposition of the liability.
Though the budget proposal in relation to the imposition of VAT on condominium units after 1st of April 2018, seems simple prima facie. In relation to the existing projects there lies many VAT complications that is not visible on the surface.
The sale of residential condominium units in projects that enjoy the strategic development status ( SDP) may have a different VAT consequence as opposed to units in other projects. This is due to the suppliers to the SDP projects do not charge VAT due to a specific VAT rule in the Act. Hence, these SDP projects may not have input VAT paid to the suppliers for recouping where as other projects would have the ability to reclaim the same against the output VAT.
Suresh R.I. Perera, LLB, Attorney at Law, FCMA (UK)