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New VAT structure places added burden on small flat buyers

  • Published at 10:34 pm July 3rd, 2018
  • Last updated at 10:35 pm July 3rd, 2018
The VAT on purchasing small apartments will place further financial stress on first time buyers Syed Zakir Hossain

'Around 80% of the apartments sold across the country are under 1,100 sft. So, the proposed hike in VAT could create an additional burden on people belonging to lower and middle income groups'

Buying a small-sized apartment is the dream of many Bangladeshi citizens, but this fiscal year’s budget throws a wrench into the plans of many prospective home-owners.

The budget for fiscal year 2018-19, placed in the parliament in early June, proposed that the

VAT for purchasing small apartments, under 1,100 square feet (sft), be hiked from the existing 1.5% to 2%.

Around 80% of the apartments sold across the country are under 1,100 sft. So, the proposed hike in VAT could create an additional burden on people belonging to lower and middle income groups who are planning to buy small-sized apartments.

On the other hand, buyers looking for mid-sized apartments benefitted from the budget, as the VAT for apartments of sizes between 1,100-1,600 sft were slashed from 2.5% to 2%. The VAT for large-size apartments above 1,600 sft remains at the existing rate of 4.5%.

Sources from the real estate sector told the Dhaka Tribune this particular government move could discourage homebuyers looking for small-sized apartments—which could negatively impact the market.

If the real estate sector faces difficulties, the government revenue stream would be affected too, said the insiders.

Real Estate and Housing Association of Bangladesh (REHAB), in its pre-budget proposal for 2018-19 fiscal year, recommended that apartment prices be cut by 7%—pointing out that sales are slowing due to high registration costs.

Addressing the issue, Liakat Ali Bhuiyan, first vice-president of REHAB, told the correspondent: “Bangladeshi homebuyers pay around 14% to 16% in overall registration costs for apartments and plots.

“However, the tax rate for apartment and plot registration in other South Asian Association for Regional Cooperation (SAARC) countries remains within 4% to 7%.”

He continued: “The new rates proposed in the national budget would create difficulties for low and middle income people seeking to buy a home, as there was no initiative to implement the REHAB proposals in the budget.”

In a difficult spot

Abu Nur Mohammad, who works at a private firm in Dhaka, has been planning to buy an apartment in the Uttara area. He estimates it would require around Tk50 lakh to buy a 1,000-sft apartment in his preferred location.

Abu is currently short on funds. He needs around Tk30 lakh more to purchase a home, and is planning to take out a home loan from a bank.

The high registration cost and increased VAT on apartment purchases have complicated  his situation.

“Compared to its neighboring countries, the registration cost for apartments is extremely high in Bangladesh. The government recently increased indirect tax, and the burden falls on the shoulder of consumers,” Abu told the Dhaka Tribune.

He added that in order to buy an apartment worth Tk50 lakh, he would also have to pay around Tk8 lakh as tax during registration.      

The Centre for Policy Dialogue (CPD), in its post budget reaction, also pointed out that the VAT on small-sized apartments will increase the tax burden  on consumers.

The government also imposed a 2% VAT on re-registration fees for old and used apartments—putting a buyer of second-hand real estate in a tough spot.

This measure was proposed at a time when real estate operators demanded the government reduce apartment registration costs to make the sector more vibrant.

In its proposal to the government, REHAB also recommended fixing the VAT at 1.5% of the value of the property.

According to REHAB, from now on, homebuyers will have to bear an additional cost of Tk20,000-Tk25,000 for re-registration.

In a recent statement, REHAB President Alamgir Shamsul Alamin said price readjustment in Bangladesh’s real estate market did not come down to a level that was affordable for people of the middle income group.

“It could have come within their [themiddle income group’s] reach if the government had reformed the registration fees and the tax structure,” the REHAB president told the Dhaka Tribune.

Real estate market insiders commented that though the interest on housing loans came down to   single digits, it is yet to bring any benefit to buyers of apartments due to the cumbersome process, and unwillingness, of the banks to provide home loans.

A blessing for public servants

Interestingly, the FY19 budget came as a blessing for public servants seeking to buy apartments.

With his budget speech on June 7, Finance Minister AMA Muhith said the government has formulated a policy guideline to provide loans from the banking system—bearing in mind the fact that the government employees, especially the new entrants should own an apartment or a house.

“The new policy will become effective in the next fiscal year. Under this policy, a public servant will be entitled to loans for the construction of a house, or purchase of flats, anywhere in the country,” Muhith said in a recent statement.

He added that this loan will be provided to public servants at a moderate interest rate through the banking system, and the interest differential will be paid by the government as a subsidy to the commercial banks.

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