VAT on Sale of Extra Car Park

I had reached bit early for my meeting with "ANG" Real Estate Developer’s executive.  On the top of it, got a call from Mr. Executive that he is running late by 30 minutes. With nothing much to do, I went inside the office and got myself few property brochures and a steaming hot cup of coffee. There were other executives also explaining various residential deals and options available. Infact I was myself there looking for a ready to move in property too.  Maybe it’s just a coincidence but the potential customer sitting next to me with property agent was discussing something which I found very interesting and infact gave me fodder to write this article. 

Just a quick background about this particular residential project offered by "ANG" Developer, there were 2 BHK  and 3 BHK apartments up for sale with 1 car parking  with two BHK apartment and 2 car parkings with  a  three BHK apartment respectively. Now this customer sitting next to me was buying a 2 BHK apartment but wanted an extra car park space. And the bone of contention was VAT on this extra car space.

The sale of residential property is an exempt supply [Article 46(2) of Federal Tax Law] with the exception of first sale of newly residential property which is zero rated [Article 45(9) of Federal Tax Law]. Ordinarily  the sale of residential property is accompanied with a car park space , which for VAT purposes is treated as a single composite supply and not two supplies – one of the property and other one of car park space [Article 4 of Executive Regulation]. Accordingly, this potential customer’s 2BHK unit with single car park space will be zero rated. However, he was exploring an option to buy an extra car park and was visibly not happy when he was told that he might need to pay VAT at the standard rate of 5% to buy an additional car space. This particular conversation caught my attention and made me explore further on this aspect.

And below is my analysis for the same.

This provision of an extra car park by the developer will be subject to VAT at the rate of 5%  as the developer  will be  providing a separate supply of additional car space, other than the sale of apartment. This sale of an extra car park space may alter the sale from being treated as a single composite supply to now a sale with two separate supplies :

• One , an apartment accompanied with a car park;
• Second, an additional car park.

This is because:

• The apartment and the additional car park can be purchased separately;
• There may be a timing difference between the sale of apartment and sale of extra car park. 
• The additional car space will be a separate item in the sale and purchase agreement.

So in all likelihood, VAT at the standard rate of 5 % will be charged on the sale of extra car park , and VAT on sale of apartment will be zero rated. 

Just to go a bit further and in future , if he decides to sell this property with both car parks - one accompanied and one purchased,  then this sale in secondary market will be exempt from VAT (Article 46 of Federal Tax Law)  and he won’t be able to recover VAT paid on buying this extra car park. In this scenario, the most intelligent thing will be to increase the property price accordingly.

Relevant articles and regulations used in analysis of this article are quoted below:

Federal Decree Law Article 45(9) Supply of Goods and Services that is Subject to Zero Rate: 
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.

Federal Decree Law Article 46 (2) Supply Exempt from Tax:
Supply of residential buildings through sale or lease, other than that which is zero-rated according to Clauses (9) and (11) of Article (45) of this Decree-Law

Executive Regulation Article (4) Supply of More Than One Component:

1. Where a Person made a supply consisting of more than one component for one price, the Person shall determine whether the supply constitutes a single composite supply or multiple supplies. 

2. The phrase “single composite supply” means a supply of Goods or Services, where there is more than one component to the supply, and taking into account the contract and the wider circumstance of the supply. 

3. A single composite supply shall exist in the following cases: 

a. Where there is supply of all of the following: 

1) A principal component. 
2) A component or components which either are necessary or essential to the making of the supply, including incidental elements which normally accompany the supply but are not a significant part of it; or do not constitute an aim in itself, but are instead a means of better enjoying the principal supply. 

b. Where there is a supply which has two or more elements so closely linked as to form a single supply which it would be impossible or unnatural to split. 

4. A single composite supply may exist under Clause (2) of this Article if all of the following conditions are met: 

a. The price of the different components of the supply is not separately identified or charged by the supplier. 
b. All components of the supply are supplied by a single supplier; 

5. Where a Taxable Person supplies more than one component for one price and the supply is not a single composite    supply, then the supply of the components shall be treated as multiple supplies. 

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