Will new taxes further harm the condo industry’s contribution to economic growth? – Adaderana Biz English
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 (30 May) to remove the concessional land exemption from value added tax levied on condominiums could spell disaster 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 8 acres of land, and in 1950 you only needed 4 .75 rupees to exchange one 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 has been recognized as an alternative that can 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 Lands (Restrictions on Alienation) Act No. 38 of 2014which prohibits foreigners from buying land in the country, but allows foreigners to buy units above the 4th floor of a condominium. Land (disposition restrictions) (amendment) Law 2018’s #21 erased the words “units above the 4th floor” and allowed “any unit on any floor”, further confirming the condominium’s targeting of strangers. 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 through an incoming foreigner
handed over before the signing of the corresponding deed of transfer”– Section 3 (1) b of the Restriction of Alienation of Lands Act No. 38 of 2014
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 the 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 the investment of the country’s condominium properties in 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. Colombo Port City Economic Commission Act No. 11 of 2021and particularly Part 10 of it, provides provisions that can modify the existing condominium law of the country to suit the port city if necessary. It is clear 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 of the country.
The Ministry of Justice has also decided to update the existing laws in 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 country’s economy by making changes to adapt 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 decision was as follows:
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 (25.04.2022), the government decided that condominium property should be used for sale to earn foreign exchange.
However, instead of looking at the difficulties facing the industry and trying to alleviate them and trying to find a solution to the economic crisis based on condominiums, 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 led to a price spike. The economic crisis the country is facing is creating a very difficult situation for the industry as the prices of all inputs have increased. Operational costs increase in parallel. If industry is forced to downsize, one of the first results would be job losses for over a million workers, 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 have been granted a 40-year tax break, that is not what is demanded by the Sri Lanka Condominium Developers Association. Their sincere request to the government is not to add additional burdens to the industry with crushing taxes.
Author: Kapila Gamage for the Sri Lanka Condominium Developers Association.