Recent tax developments on residential condominium properties
Legislative changes in the tax arena have been comparatively slow in relation to the other years in the recent past due to the Budget Proposals being presented in March 2019 instead of November 2018. During the last 10 months ( until October 23, 2019) Parliament has not enacted any tax legislations effecting taxation other than the Gazettes that have been issued to introduce changes including the reduction of the VAT rate applicable to hotelier, guest houses, restaurants, travel agent etc.
Three Bills, in relation to the enactment of the March Budget Proposals, to amend the VAT, NBT and Finance Principle Statutes were published in July 2019 have now been passed in Parliament on October 23 subject to the Speaker’s certification.
These amendments include draft laws that would be of interest to many readers. Imposition of VAT on residential condominium property, change of law pertaining to NBT on the construction industry and the hoteliers, imposition of a foreign commercial transaction levy on usage of payment cards, amendment to the luxury tax on motor vehicles to extend it to all vehicles subject to a threshold are the significant changes passed in the Parliament.
We draw the attention of the readers to the latest tax changes that affect the condominium properties and construction industry stemming from the VAT and NBT amendments passed into law.
VAT on Residential Condominium Property
In recent years VAT on condominium properties has generated much interest on stakeholders including property developers and customers. The VAT law pertaining to both leasing and sale of residential accommodation has witnessed many statutory changes compared to the status that prevailed at the inception of the concept of taxation of value addition in Sri Lanka similar to countries such as Singapore, Malaysia, New Zealand etc. Residential accommodation was not included in the VAT tax base of Sri Lanka at the inception, as residential accommodation is a basic necessity. However at present, pursuant to the changes in the VAT law, the leasing of residential accommodation is treated on par with the leasing of commercial accommodation in that, both attract VAT.
The sale of residential accommodation continues to be outside the VAT net. However the policy makers have been moving towards making an exception with regard to sale of residential condominium housing units during the past two years with successive budget proposals expressing the intention to impose VAT on residential condominium housing units.
Budget proposals presented in November 2017 stipulated that VAT exemption applicable on residential sale of condominium properties will be removed for the first time.
However an administrat ive amendment was introduced to the VAT Act on the VAT on residential condominium properties by way of a press notice to ensure that VAT would not be applicable until March 31, 2019.
Budget proposals for 2019 before Parliament in March stipulated that VAT would be applicable on sale of residential condominium units. However the said budget proposals also provided relief to small scale residential condominium housing project where each and every housing unit cost was below Rs. 15 million. The Budget speech 2019 further stated that "VAT imposed on the supply of condominium housing units will be implemented with effect from April 1, 2019 where deed of agreement relating to such supply is not executed prior to April 1, 2019".
As per the recent VAT Bill and the Committee Stage Amendments issued to amend the VAT Act, though condominium housing units are liable for VAT from 1/ 4/ 2019, three exceptions have been provided to the rule.
■ Sale of housing units from condominium housing projects where all the units are below Rs. 25 million ( as opposed to Rs. 15 million mentioned in the budget speech).
■ Where agreement to sell pertaining to the housing unit has been legally executed prior to the commencement of the amending act ( i. e. certification of the Act by the Speaker).
■ Where Certificate of Conformity (COC) of the housing unit issued prior to the commencement of the amending act ( i. e certification of the Act by the Speaker).
In other words the transactions that would be carried out prior to the certification of the VAT amending Act would be free of VAT provided there is a legally executed ' agreement to sell' or COC issued prior to the date of certification of the Amending Act by the Speaker.
It is significant to note that the lifting of the ceiling of the condominium units from Rs. 15 million to Rs. 25 million was only first indicated in the VAT Bill issued on July 31, 2019 which later was passed into law on October 23. If there were any transactions carried out with VAT at the rate of 15 per cent being charged on any qualifying housing units below Rs.25 million, and if such VAT is not refunded by to the customer there may be unjust enrichment to the tax office.
It would be interesting to see the approach of the tax office, to unscramble the scrambled egg and to serve justice to the customers if such transactions have been charged with VAT during the said period.
The committee stage amendments also indicates that there are policy moves underway to reduce the 15 per cent VAT rate on the sale of residential condominium housing units to 6 per cent in the future. If this policy is to be executed the rate of 6 per cent would have to be issued by way of a gazette notice. On the other hand, the committee stage amendment indicates that the entitlement for the claim of input VAT on the seller would be restricted to a mere 5 per cent in relation to his imports and purchases.
VAT and NBT amendments effecting construction industry
The construction industry has also witnessed indirect tax changes due to the recently passed VAT and NBT amendments. A provision has been introduced in the VAT Act to ensure that a construction contractor executing a project outside Sri Lanka and sourcing goods in Sri Lanka for such project to be deemed engaged in exporting such goods. This ensures that such construction contractor will be able to claim the zero rate for sourcing of such materials from Sri Lanka to outside Sri Lanka.
In addition, construction contractors have also been given relief in relation to NBT by granting NBT free status for the services rendered, a privilege enjoyed by such contractors at the inception of the NBT Act in 2009.