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Chinedu Ezomike, Tinuola Ishola and Ademola Idowu, KPMG Advisory Services, Nigeria
Chinedu Ezomike is Senior Manager, Tinuola Ishola is Manager and Ademola Idowu is Senior Adviser with KPMG Advisory Services, Nigeria
The Nigerian Government faces a major challenge to provide affordable housing to its rapidly urbanizing population. The issue of whether VAT should apply to the sale of housing units and land for property development has serious implications for real estate developers.
The Nigerian population, at about 170 million, is the largest in Africa. Since the early 1980s, due to sociopolitical and economic reasons, the country has witnessed a persistent increase in rural–urban migration. Thus, the urban population is growing at a high rate (estimated at 5.8 percent per annum) and currently comprises over 50 percent of the total population; this is projected to rise to about 60 percent by 2025 (see reference 1 below).
The Nigerian Government therefore faces a major challenge in providing affordable housing to its citizenry, especially in urban areas. Fortunately, many private estate developers have recognized the opportunities inherent in this sector and are stepping in to bridge the gap and provide affordable housing for the populace: accordingly, estates of all sizes, with affordable housing schemes, are springing up in urban areas. The development and sale of houses, including flats, terraces, semi-detached duplexes and full duplexes, is now an active trend and the market is continually expanding.
One of the fundamental issues now facing the industry is the question of whether value added tax (“VAT”) should apply on the sale of the housing units, and, indeed, on the sale of land for property development. This article examines the legal basis for imposition of VAT in Nigeria and its applicability or otherwise to the sale of land and buildings.
VAT is a consumption tax, which applies to the supply of goods and services. It is a tax levied on value created at each stage of the production and distribution value chain. The burden of the tax is eventually borne by the final consumer; tax is built into the cost of items produced at each stage.
The VAT Act, Cap. V1, Laws of the Federation of Nigeria, 2004 (as amended by the VAT (Amendment) Act, 2007), is the legal basis for imposition of VAT in Nigeria. The Act provides that VAT is applicable at a flat rate of 5 percent on the supply of taxable goods and services, other than those specifically listed as exempt in the Act. In addition, the Federal Inland Revenue Service (“FIRS”), which is the body responsible for administering VAT in Nigeria, has issued several information circulars to further clarify the scope of VAT exempt items. A review of the schedule of exempt items shows that land and buildings are not included in the list, and this may suggest that the sale of land and buildings is not exempt from VAT and is therefore liable.
The FIRS usually adopts the position that once an item is not included in the VAT exempt list, VAT becomes automatically applicable to such item. This opinion is based on their view that all items not specifically mentioned in the VAT exempt list are VATable, irrespective of whether or not they qualify as “goods” or “services.” But is this really correct? Given that the law is quite explicit on the fact that VAT applies on the supply of goods and services, it is necessary to establish that there has been a supply of goods and services before VAT can be said to apply. We will, therefore, examine whether the sale of land and buildings constitutes a “supply of taxable goods or services” in line with the VAT Act.
The VAT Act does not define the terms “goods” and “services.” For our purpose, we have relied on other sources for guidance. The U.K.’s Sale of Goods Act of 1979 defines “goods” as:
all personal chattels other than things in action and money … all corporeal moveables except money; and in particular includes emblements, industrial growing crops and things attached to and forming part of the land which are agreed to be severed before sale or under the contract of sale.
Similarly, the Lagos State Sale of Goods Act of 2003 defines “goods” as:
all chattels personal, other than things in action and money… and includes emblements, industrial growing crops and things attached to and forming part of the land which are agreed to be severed before sale or under the contract of sale.
The above definitions are very instructive as they differentiate items permanently attached to land from those that can be severed from the land. They also imply that for items attached to land to qualify as goods, there must be an agreement to sever them from the land before sale or under the contract of sale.
Further, Black's Law Dictionary, which is often regarded as the gold standard for legal interpretations, defines “goods” as:
all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities and things in action.
Again, there is an emphasis on the movability of an item before it can qualify as a good. It can be inferred from the definitions that, to the extent that an item is not movable or severable from land, it should not qualify as a good, and by extension, the sale of such item will not qualify as a supply of a good.
If we are unable to conclude that the sale of land or buildings constitutes a supply of goods, we should also consider whether it can constitute a service. The VAT Act does not define the word “service.” However, Black's Law Dictionary defines “service” as “an intangible commodity in the form of human effort, such as labour, skill or advice.”
Arguing that the transfer of a title or interest in real property will constitute a service may not be tenable. It might well be that the activity conducted over the land is what should constitute a taxable service within the Act. Based on the definition of service as an intangible commodity in the form of human effort, skill or labor, the process of developing a building for sale may, therefore, qualify as a service.
There have been court rulings on the applicability of VAT to sale of land and buildings, and this can serve to provide further clarification on the matter. In respect of the applicability of VAT on the sale of buildings, the VAT Tribunal, in FBIR v Ibile Holdings, held that the sale of buildings involves the transfer of property in goods, and therefore, constitutes a supply of goods which is liable to VAT.
Meanwhile, in the Federal High Court (“FHC”) case Momotato v UACN Property Development Company Plc, the judge held that sale of land, in itself, does not constitute a supply of goods, and therefore is not liable to VAT. However, the judge clarified that services rendered in developing the land, such as sand filling, tarred road network, electricity supply and so on, should qualify as supply of services, and therefore liable to VAT. This suggests that the development of properties on the land can also be liable to VAT even though the land is not liable.
In the FHC case CNOOC Exploration Production Nigeria Limited v Attorney General of the Federation and Ors (2011) (although it does not entail transfer of title in land), the third defendant transferred its rights in an oil mining lease (“OML”) to the plaintiff and sought to charge VAT in respect of the sale. The authorities took the position that such an assignment of right qualifies as a “supply of goods and services” and therefore, liable to VAT. The FHC held that the right to an OML does not constitute goods under section 2 of the Act because such right is an intangible property, which constitutes a chose in action. This aligns with the judgment in the Momotato case where transfer of title in land was ruled as non-VATable.
From the joint reading of these judgments, it can be inferred that while VAT does not apply to the sale of land, it should apply on any service provided to develop the land and also to the sale of buildings.
The laws in most other jurisdictions are clear and this makes the applicability of VAT on such transactions easy to ascertain.
In the U.K., for example, though the VAT regime in relation to land and property is complex, the law provides proper guidance on what is VATable and what is not. For instance, the U.K. law defines the supply of goods to include “the grant, assignment or surrender of a major interest in land” (paragraph 4, Schedule 4, U.K. VAT Act, 1994). This is normally exempt from VAT, except in certain instances such as the supply of new (“new” buildings are those within their first three years of completion) or uncompleted buildings and accommodation in hotels. For commercial letting, the supplier can elect to waive the exemption that would normally apply on the sale of a building and opt to charge VAT under the “option to tax.” By opting to charge VAT, the supplier can recover the VAT on the costs incurred in relation to that building.
Similarly in Ghana, the provisions on such transactions are clear. Supply of immovable property, including land, attributable to a dwelling and land used or to be used for agricultural purposes is exempt from VAT. However, sale of land by an estate developer, that is, a commercial establishment engaged in the business of the construction and sale of immovable property, is liable to VAT.
In Uganda, the law is also clear on what constitutes a supply of goods, as it defines goods to include both movable and immovable property. The law, however, exempts sale of buildings used for residential accommodation (other than serviced apartments) from VAT.
In India, the manner of administering VAT on land and buildings is even more interesting. The VAT law imposes the tax on sale of immovable properties that are under construction, but exempts sale of completed structures from VAT. Also, pre-construction contracts for sale of immovable properties are liable to VAT in India.
The FIRS’ reliance on the non-inclusion of land and buildings in the VAT exempt list, as a basis for insisting that they should be subject to VAT, is insufficient. The key question of whether land and buildings constitute goods should be considered. Based on the review of judicial pronouncements, it can be concluded that the transfer of title in, or sale of, undeveloped land should not qualify as supply of goods, and is therefore not liable to VAT. However, the value of any improvements carried out on the land should be subject to VAT. In this regard also, the development of buildings on the land can be viewed as improvement on the land, and as such the sale of such building is liable to VAT.
The implication of this for real estate developers is that the sale of their houses, apartments and even serviced plots may attract VAT. This will definitely increase the cost of the properties and make them less affordable to prospective buyers.
To manage the impact of the VAT on the property price, developers can explore the option of separating the original value of land from that of the building, or any improvements made on the land, in the case of serviced plots. Since VAT is not applicable on land, it should be possible to separate VAT on only value of the buildings or developments. This will significantly reduce the amount of VAT payable on the transaction, since in most urban areas the value of the land is usually much higher than the actual cost of building and other developments.
It should be noted that such separation is already mandated by International Accounting Standard 16 which deals with accounting for Properties Plants and Equipment. Based on the Standard, the value of assets such as land and buildings should be de-componentized and recognized separately. As such, only the value of the building is recognized for the purpose of depreciation while the value of the land is amortized for the lease period. This principle of separation should also be possible for the purpose of accounting for VAT.
The above notwithstanding, it is desirable that the VAT Act is revisited to create clear provisions within the Act for proper guidance, taking into account the need to make housing affordable in order to resolve the housing deficit faced in Nigeria. The legislature may draw inference from practices in other jurisdictions where, for instance, sale of buildings used for residential purposes is not liable to VAT.
This should be done quickly so that industry players can be properly guided in taking the right steps.
Chinedu Ezomike is Senior Manager, Tinuola Ishola is Manager and Ademola Idowu is Senior Adviser with KPMG Advisory Services, Nigeria.The authors may be contacted at: firstname.lastname@example.org; email@example.com; and firstname.lastname@example.org
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