For the purpose of supply of goods under VAT, Decree-law defines goods as
“Physical property that can be supplied including real estate, water, and all forms of energy as specified in the Executive Regulation of this Decree-Law.”
Further reading of the provisions provides us that supply of real estate include sale and tenancy contracts.
“Anything that can be supplied other than Goods” including any:
- Specific area of land over which rights or interests can be created
- Building, structure or engineering work permanently attached to the land
- Fixture or equipment which makes up a permanent part of or is permanently attached to the building, structure or engineering work
Executive regulation of the Decree-law further provides that following supply related to real estate shall fall under supply of services related to real estate:
a. The grant, assignment or surrender of:
- any interest in or right over real estate;
- personal right to be granted any interest in or right over real estate;
- license to occupy land or any other contractual right exercisable over or in relation to real estate, including the provision, lease, and rental of sleeping accommodation in a hotel or similar establishment;
b. A Supply of service:
- By real estate experts or estate agents;
- Involving the preparation, coordination, and performance of construction, destruction, maintenance, conversion and similar work.
Hence, we can say the rent received on tenancy contract shall fall under supply of real estate and liable for VAT.
Article 45 of the Decree-law provides that:
“The first supply of residential buildings within (3) years of its completion, either through sale or lease in whole or in part, according to the controls specified in the Executive Regulation of this Decree-Law.
The first supply of buildings converted from non-residential to residential through sale or lease according to the conditions specified in the Executive Regulation of this Decree-Law”
Following points are brought to notice on analysis of the above provision:
- VAT is applicable at zero rates only when the transfer is related to residential building and does not include any reference to the supply of commercial (non – residential) building.
- when a non-residential building is converted to residential for the first time, VAT on the supply of commercial building shall be zero-rated.
Article 46 of the Decree-law provides that any supply of residential building through sale or lease shall be exempt from tax.
A cumulative reading of Article 45 and Article 46 provides that first supply of residential building is taxable at zero rate and subsequent supply involving residential building shall be exempt from tax.
Both exemptions and zero-rated supply do not include any reference to the supply of non – residential building. Therefore, making all other supply of real estate taxable.
On a plain reading of the above provisions, it is difficult to ascertain whether rent received by hotels for stay qualifies as a residential building or not. But if we read executive regulation of the Decree-Law it specifically provides that following shall not be included under a residential building:
Any place that is not a building fixed to the ground and can be moved without being damaged.
Any building that is used as a hotel, motel, bed and breakfast establishment, or hospital or the like.
A serviced apartment for which services in addition to the supply of accommodation are provided.
Any building constructed or converted without lawful authority.
Therefore, making the renting of a hotel and serviced apartments given to rent to corporates as taxable supply which is neither exempt nor taxable at zero rates.
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