April 6th, 2017 by Own A Space
Although the new tax is not welcomed by the end users, there is no escaping from the fact that VAT (Value Added Tax) will be levied from 1st January 2018. The VAT framework has details and sectors that will remain exempted or zero rated lies in the details.
Property market affects all citizens and expatriates through house and rent prices. It is known that commercial properties are subjected to standard rate of VAT at 5% and residential properties are exempted from this. There is exception of first sale of newly purchased property (residential) and bare land.
Commercial property developers, sellers and landlords will be accountable for VAT at 5% rate on all the property transactions. The VAT will be chargeable additionally on the normal selling price or rent. The developer, seller or landlord will not suffer any cost because of this. However, this may increase the cost of purchasing or renting commercial real estate. Given that the buyer or tenant is VAT registered, and is capable of recovering the VAT charges, the obligation must not build an additional cost.
The sale and renting out of all properties which include commercial retail outlets are likely to be subjected to VAT. Some businesses such as banks and financial institutions are not likely capable of recovering from VAT on their purchases and hence if the prices go up because of this applicability, it will be a direct cost for them.
The valuation of commercial properties and prices will also increase. Commercial and retail units must be more expensive by 5% with respect to their rental pricing. Their valuations and prices will consequently increase by 2-5%, which is an assumption.
First sale of residential property is subjected no rate of VAT. The developer treats the new residential accommodation sale as zero rated for VAT because he is able to recover the VAT incurred on the developing cost of property. The resale of residential units will most likely be without VAT which will encourage activity in the secondary market.
Even though the introduction of VAT increases property costs, there are also positive effects because it can help ease, the boom-bust cycles, which can be hugely disruptive.
It is favorable because it will presumably fund important government services, like infrastructure and public safety, all those things which help augment the quality of life and value proposition of Dubai city.
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