The property sector is yet again at the receiving end of Uganda Revenue Authority’s punitive tax regime. This time, thanks to the Tax Appeals Tribunal (TAT), in their recent ruling in the tax case of Sharad Karia v URA on November 4, 2024.
In brief, the ruling, denies VAT exemption for apartments which are furnished and offer additional amenities. This ruling, will have detrimental consequences on the property sector, a once highly attractive asset class to invest in.
By deeming these apartments subject to VAT, the TAT’s ruling overlooks the significant investment made by property owners to enhance and differentiate their offerings in a competitive market, often to the benefit and advantage of the tenant.
The market for rented apartments attracts a different calibre of tenants. Some demand fully serviced and furnished apartments with additional facilities and amenities on site and others may not. The rent differs accordingly, and the ability of the residential market to cater to different preferences is what enables growth and development of the sector from which more taxes can be collected.
The ruling to impose VAT on these “serviced” apartments will lead to increased operational costs for owners, resulting in higher rents for tenants and potentially reducing the overall affordability of quality housing in the market. It will also make a case for existing “serviced” apartments to be stripped of these facilities and amenities, which will lead to an over- supply of vacant apartments on the market, putting downward pressure on rent and the yield curve.
One would have thought that with such an acute shortage of housing (both for owner occupation and investment) in the country, there would be increased focus on attracting investment in the residential sector.
Moreover, the ambiguity in defining service apartments in the law creates uncertainty for property owners and discourages further investment in developing or upgrading residential properties to address the housing shortage. This ruling also sets a concerning precedent that will stifle innovation and deter property developers from introducing new and improved residential offerings to meet not only the changing needs and preferences of tenants, but demand from home owners.
Considering these negative impacts on the residential property sector, there is need for a more nuanced understanding of the value generated by apartments, with added amenities. The amenities in discussion have be- come a standard offering in other markets and are not considered an extra ordinary value add to a property. The value addition created is captured in the rent which is already subject to rental income tax. So why the need for another layer of taxers to further frustrate and burden the taxpayer who is already being choked by existing taxes?
Clear and coherent laws and regulations are essential to support the growth and sustainability of the property market in general while ensuring a balance between regulatory compliance and promoting investment in the property sector. I have opined on several occasions that there is need for increased collaboration amongst different public entities whereby information is shared instead of operating in silos.
In conclusion, there is always an opportunity to consult with captains of the real estate industry such as Knight Frank, on the consequences and impact of such precedents being set before rather than after the fact. TAT may have won the battle in the short term but may lose the war of collecting more taxes.
The writer is the Managing Director at Knight Frank.