In the wake of continuing uncertainty with regard to the effective date on the reintroduction of Value Added Tax (VAT) on residential condominiums, leading global real-estate consulting agency, Jones Lang LaSalle (JLL) released a new report analyzing the likely impact of impending policy changes on the Sri Lankan real estate sector.
Following the announcement of amendments to the Value Added Tax Act, No. 14, of 2002, (Amendment Act No. 25 of 2018) certified by the Speaker on 16 August 2018, and the termination of the exemption of VAT on the supply of residential accommodation, other than lease or rent, it would appear that all sales of condominium properties in Sri Lanka, over LKR15 million, now attract VAT at 15% of the sale price, in addition to Stamp Duty and NBT, effective from 16 August 2018.
However, the report noted that the industry is currently rife with speculation that further government announcements may clarify the effective date of imposition as 1 April 2019.
“This only adds to confusion over government policy and fuels industry wide gloom, compounded by a lack of clarity and consistency from policy makers. While it is difficult to find anyone who welcomes the removal of the exemption, and, therefore imposition of VAT on residential sales, with immediate effect, equally, history tells us that a fake ‘gold rush’ of sales, to beat the deadline, if 1 April is confirmed, followed by a dramatic fall off, afterwards, is just as unwelcome,” the report noted.
In that context, JLL noted that the fact that such major changes to fundamental policies continued to proceed in fits and starts has thrown further doubt over proceedings and reduced transparency as to the intended outcomes of these policies and to what extent the industry’s varied stakeholder considerations had impacted policy.
“Is the VAT levy purely a revenue gathering exercise or an attempt to manipulate the market by dampening demand in the higher reaches of the condominium market and, if so, why? This confusion undermines confidence, and confidence is the key to any market, be that real estate, or any other product, so, if the intention is to raise revenue, the VAT measure is counter-productive, and, if it is intended to dampen demand, when absorption rates, for luxury condominiums, currently averages 50% in Colombo, why would the government want to see stalled development projects and vacant development plots littering the Colombo environment?” the report queried.
Even if in the alternative, the Government’s unstated aim with these policy amendments was to concentrate developer focus on low cost and social housing, for social policy reasons, JLL warned that continuing policy uncertainty would only create barriers to the commercial development of such properties when combined with continuing land price speculation and a serious gap in public transport infrastructure.
Regional experiences in taxing real estate
In order to shed more light on the likely impact of this impending shift in taxation policy, JLL drew parallels to the experiences of other countries in the ASEAN region that had recently imposed rafts of real estate taxes. While the report acknowledged the significant variance in relation to underlying rationale in other geographies, JLL nevertheless emphasized the value of such comparison, particularly given that the most prominent rationale for such moves as in Sri Lanka had been to rein in rampant market growth while promoting socio economic policy.
In that regard, the report noted that the Indonesian government introduced a revised luxury tax of 20% on units over IDR10 billion in 2015, resulting in weak sales and subdued market conditions in the luxury sector, impacting both new unit launches and resulting sales.
In Jakarta, in 2016, 11,000 units were released for sale and sales numbered 10,500. In 2017, only 3,500 new units were launched and sales slumped to some 4,000 transactions, a fall of 68% and 62% respectively while sentiments are predicted to remain subdued, with flat, or falling, prices, on both primary and secondary markets, especially given that the Indonesian market is heavily skewed to local demand.
“Although the population of the urban municipality of Jakarta exceeds 10 million and the market dynamics differ to Colombo, these statistics may correlate closely to condominium sales in the commercial capital, as 95% of demand originates from Sri Lankan residents and ex pats,” the report noted.
Similar, yet more conservative measures were also adopted in Malaysia through the introduction of a 6% Goods and Services tax on land sales and construction materials/services which in turn resulted in a 3.5% rise in unit prices in the luxury sector. Even this relatively small increase in taxation caused subdued conditions in the high-end condominium market, with developers scaling back on new property launches amid continued weak demand.
Meanwhile, in the Philippines a different agenda was adopted with a view to shifting policy away from direct to indirect taxation, in an effort to reduce poverty and increase middle income status. A 12% VAT levy was imposed on luxury condominiums, together with significant incentives for the development of low cost housing projects.This saw a shift towards affordable projects. Unlike Sri Lanka however, these transitions were explicitly stated by the Government at the very outset, providing the industry a clear direction to follow.
“It remains to be seen how the market in Sri Lanka reacts to the new announcement, and subsequent imposition of VAT on condominium sales, whether in August 2018, or April 2019, but, even when making allowances for differing agendas and demographics, the above examples demonstrate that, changes in property taxation regimes, when not linked to clear policy goals, result in confusion and a steep decline in activity. This makes identifying any particular beneficiaries, under any new regime a real challenge.
“In effect the Government has targeted the sector, in isolation, where a multi-faceted approach is what is called for. In doing so, Sri Lanka risks missing the opportunity to foster controlled property sector growth, and increased FDI, as the country continues to emerge on to the global investment stage as one of the last remaining prospects for genuine growth in the entire region,” the report noted.
In that regard, JLL called for the development of a policy framework that would be more conducive to the functioning of a robust property sector underpinned by local and international demand.
This would in turn make significant contributions to an expanding and open economy, with trickle down effects, such as employment prospects, increased personal spending, tourist arrivals and improved infrastructure and utility provision, to the benefit of the entire population.