The new taxes, a challenge for the condominium industry

The condominium industry in Sri Lanka has not only supported the real estate sector, but has also supported the country’s economy amidst a twin crisis.

A recent Cabinet decision (May 30) to abolish the concessional land exemption from value added tax levied on condominiums could be catastrophic for the industry and the economy as a whole.

Since 1950, successive governments have recognized that the best way to use residential land more efficiently is to use condominium ownership.

The Torrington Housing Scheme in Colombo was the first and was introduced in 1950. One hundred and twelve houses (about 11.5 perches per house) were built on eight acres of land, and in 1950 you only needed Rs .4.75 for a dollar. At that time, there was no connection between the construction of condominiums and currencies, the value of the dollar or foreign exchange reserves. There was no need to focus on such a relationship.

But as the dollar gradually appreciated against the rupee, condominium properties were identified as a means of maintaining the value of the rupee; maintain foreign exchange reserves and earn foreign exchange. The condominium industry in Sri Lanka was recognized as an alternative that could be used not only to meet the housing needs of the people of the country, but also as a source of foreign exchange income.

This is illustrated by the fact that the Land (Restrictions on Alienation) Act No. 38 of 2014, which prohibits foreigners from buying land in the country, yet allows foreigners to buy units above the 4th floor of a condominium. The Lands (Restrictions on Alienation) (Amendment) Act No. 21 of 2018 removed the words “units above the 4th floor” and allowed “any unit on any floor”, further confirming the targeting foreigners by co-ownership. Attempts to attract foreigners by even removing the 100% tax levied on the transfer of property to foreigners some time ago shows that condominium ownership was recognized by the government as a means of earning foreign exchange. This is further confirmed by an in-depth study of the conditions imposed on foreigners for the purchase of a property in joint ownership. That’s to say;

“Provided that the full value is prepaid by means of an overseas transfer of funds prior to the execution of the relevant deed of transfer” – Section 3 (1) b of Act n ° 38 of 2014 on the restriction of alienation of land

It is clear that joint ownership has been identified by previous governments as a means of earning foreign currency. Consequently, the condominium properties in the country have been built in large scale and the local and foreign developers and investors have invested in the sector and introduced several constructions of international standard in the country.

The Urban Development Authority and Board of Investment encouraged these investments by providing large tracts of land on a 99-year lease. This is confirmed by the introduction of the Real Estate Investment Trust (REIT) in 2020, which also facilitates investments in condominium properties on the open market.

The goal was to create another fellowship based on co-ownership. It is clear that the authorities have taken these measures to strengthen the economy of the country by giving the Sri Lankan economy also a share similar to what other countries have given to their economies by using condominium properties.

La Cité Portuaire, considered another major economic breakthrough in the country, is also a project based on the concept of co-ownership. The Colombo Port City Economic Commission Law No. 11 of 2021, and in particular its Part 10, provides provisions that may amend the condominium law of the country depending on the port city if necessary.

It appears from a study of the law that the authorities have decided to build the Port City project entirely on the concept of condominiums with the aim of reviving the economy.

The Department of Justice also decided to update the laws of the country and update the law on condominium ownership to make it more relevant today.

A number of modern changes are proposed, including the introduction of new provisions on mixed condominium developments. This is further evidence of the government’s policy to elevate condominiums to an important role in the economy by making changes appropriate to new conditions.

The most recent evidence is that authorities have sought to rely on joint ownership in the face of the current financial crisis. The Cabinet decided on April 25, 2022 to grant residency visas of 5 to 10 years to foreigners who invest at least US$75,000 or more to purchase condominium properties in Sri Lanka.

The condominium industry, which has such a close relationship with the country’s economy, is also facing a crisis situation with the soaring prices of building materials and their scarcity. In such a scenario, the decision to reimpose the condo industry is counterproductive and should be reconsidered.

On May 30, the Cabinet decided to remove the concessional real estate exemption from value added tax levied on condominiums. If for some reason the condo industry was exempted from this value added tax by previous governments, today the exemption is much more justified. A little over a month ago (April 25), the government decided that the condominium should be sold to earn foreign currency.

However, instead of looking at the difficulties facing the industry and trying to alleviate them and find a solution to the economic crisis based on condominium properties, the decision to remove even the existing tax advantages is paradoxical.

Authorities need to think deeply about the dangers this move could bring to the condo industry and the country’s economy. The shortage of building materials due to the currency crisis has caused prices to soar.

The economic crisis creates a very difficult situation for the industry because the prices of all inputs have increased. Operational costs increase in parallel. If the industry is forced to cut spending, one of the first results would be the loss of jobs for over a million people, forcing over ten million people into hunger and deprivation. Needless to say, this would have a domino effect on the economy.

The condo industry is not asking for tax breaks or other benefits. Even though investors in the port city got a 40-year tax break, that’s not what the Condominium Property Developers Association of Sri Lanka is asking for. Their sincere request to the government is not to add additional burdens to the industry with crippling taxes.

Written for the Condominium Property Developers Association of Sri Lanka

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