Introduction

With its realisation of the futility of heavy reliance on oil revenue, Nigeria is taking giant strides to refocus its revenue generation strategy by in focusing more on non-oil revenue to alternative sources. This has led to an aggressive tax regime by the Federal Government to ensure that more revenue is derived from taxes. In encouraging tax compliance by tax payers, the Federal Government introduced the Voluntary Assets and Income Declaration Scheme (VAIDS).

There is however a fear of government ignoring the letter of the existing tax laws in its quest to generate more revenue to its coffers by bringing in more taxpayers into the tax net. This fear has in fact become a reality, especially when it comes to real estate.

Recently, a client of ours in the Real Estate Sector was in the process of acquiring a piece of property in the Lekki axis of Lagos. The purchase price had already been agreed, necessary due diligence investigations conducted at the land registry, and title over the property was certified to be unencumbered. The prospective seller of the property issued his invoice to our client for the sale of the land and included Value Added Tax (VAT) of 5% to the purchase price. Our Client was startled by the inclusion of VAT and requested to know the position of the law on VAT on property transactions.

Though Nigeria’s VAT rate of 5% pales in comparison to other countries including the United Kingdom which charges 20%, it makes a difference on large transactions such as property and real estate. The Taxman’s interest in these burgeoning property transactions is not surprising as he seeks to generate revenue for government. But the question that needs to be asked and answered is: is VAT applicable to property and real estate transactions, or are buyers being made to bear an unnecessary unlawful cost?

Understanding VAT vis-à-vis Property Transactions

VAT is a consumption tax that has been embraced by many countries all over the world. Since it is a consumption tax, it is relatively easy to administer and difficult to evade.

The Federal Government’s will to diversify the economy is understandable in the face of the current economic situation of the country. With the fluctuating inflation rates, the single most important aim of Nigeria’s tax policy would be to raise more revenue. Consequently, government through the Federal Inland Revenue Service (“FIRS”) is taking steps to bring into the tax net, real estate and property transactions with a conviction that these transactions are subject to VAT.

But what does the VAT Act have to say about this?

What is VATable under the VAT Act?

As earlier pointed out, VAT is a consumption tax which applies solely to the supply of goods and services. It is a tax levied on value created at every stage of the production and distribution value chain. It must be pointed out however, that the burden of VAT is ultimately borne by the final consumers, as he has to pay higher sum for the goods purchased or services rendered.

Section 2 of the VAT Act 2007 (“the Act”) provides that the “tax shall be charged and payable on the supply of all goods and services (in this Act referred to as “taxable goods and services”) other than those goods and services listed in the First Schedule” to the Act. Section 3 of the Act however exempts the goods and services listed in the First Schedule to the Act from VAT.

Goods exempt

1. All medical and pharmaceutical products
2. Basic food items
3. Books and educational materials
4. Baby products
5. Fertilizer, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment
6. All exports
7. Plant, machinery and goods imported for use in the export processing zone or free trade zone
8. Plant machinery and equipment purchased for utilization of gas in the down-stream petroleum operations
9. Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes

Services exempt

1. Medical services
2. Services rendered by community banks, People’s bank and mortgage institutions
3. Plays and performances conducted by educational institutions as part of learning
4. All exported services

A cursory look at the exempted items in the list above shows that land and buildings are not included on the list. This would naturally suggest that the sale of land and buildings is not exempted from VAT and as such VAT is applicable to such transactions. However, one should not be too quick to come to this conclusion. Perhaps, a starting point will be with the definition of “goods” or “services” and to determine whether the sale of land or property transactions fall into any of these.

Unfortunately, the Act does not define the terms “goods” or “services” and therefore makes recourse to judicial and statutory definitions necessary.

The Lagos State Sale of Goods Law, 2003¹ defines “goods” as “all chattels personal, other than things in action and money, and includes emblements, industrial growing crops, and things attached to and forming part of the land which are agreed to be severed before sale or under the contract of sale.” Furthermore, Black’s Law Dictionary² defines “goods” as “tangible or movable personal property other than money, especially articles of trade or items of merchandise.”

From the definition of “goods” above, it is clear that before an item can be regarded as a “good”, it must be moveable. We can therefore safely conclude that a sale of land, buildings or part of buildings, does not constitute a supply of goods. The next question to then ask is: does it qualify as a supply of services?

Sadly again, the Act fails to define the word “service” and a recourse again will be had to the Black’s Law Dictionary. It defines “service” as “an intangible commodity in the form of human effort, such as labour, skill or advice.”

Consequently, the sale of land or transfer of an interest in a building does not qualify as a “supply of services” and based on the above, we are of the opinion that VAT is inapplicable to these transactions.

We must however point out that where VAT is in relation to professional services e.g, legal or agency services rendered in the course of real estate and property transactions, our position will be different. These services involve human effort, skill or labour and as such will be liable to VAT.

In its drive to increase tax revenue generation, the FIRS has always held the view that real estate and property transactions are not exempted from VAT and as such, are liable to VAT. The FIRS’ position appears to be based on the fact that real land and or buildings are not one of the exempted goods or services on the list on the First Schedule to the VAT Act - and that items not specifically exempted are VATable regardless of whether or not such items qualify as “goods” or “services”.

It appears also that the FIRS has placed a further reliance on the definition of “taxable persons” under Section 46 which defines “taxable persons” to include “an individual or body of individuals, family, corporations sole, trustee or executor or a person who carries out in a place an economic activity, a person exploiting tangible or intangible property for the purpose of obtaining income therefrom by way of trade or business or a person or agency of Government acting in that capacity.” It has therefore been argued that if the quoted provision is read in conjunction with Sections 2 and 3 of the VAT Act, the law contemplates that intangible property such as a transfer of interest in real property will be subject to VAT.

In a matter before the Value Added Tax Tribunal³, the Tribunal held amongst others that sale of buildings involves the transfer of property in goods, and therefore constitutes a supply of goods which is liable to VAT. However, The Federal High Court⁴ which is a superior court of record, held a different. It held that the sale of land in itself does not constitute a supply of goods and thus not liable to VAT. The Court went further to hold that activities such as sand filling, electricity supply and road tarring amount to the supply of services given the fact that these were undertaken in the course of developing the land.

Following the trend in the Momotato’s case, the Federal High Court⁵ (in a matter not involving transfer of title to land) held that the right to an Oil Mining Lease (“OML”) does not constitute goods under Section 2 of the Act - because such a right is an intangible property, which constitutes a chose in action. In that case, the third defendant transferred its rights in an OML to the plaintiff and sought to charge VAT in respect of the sale. The FIRS took the position that the transfer of the right qualified as a “supply of goods and services” and therefore liable to VAT.

In view of the above, and from the judgments of the Federal High Court above, we remain of the opinion that VAT is not applicable to the transfer of an interest in land, buildings or any part of the same. It is however applicable to any services rendered in the course of developing the land and or its transfer. It is instructive to also mention at this juncture that, as a general rule the provisions of tax statures must be strictly construed when interpreting them, owing to their expropriatory nature and their impact on an individual’s constitutional the right to property⁶.

Noting the controversies being generated by whether VAT is applicable to real estate and property transaction or not, and coupled with the Federal Government’s policy to boost ease of doing business in Nigeria, the Federal Executive Council approved⁷ an Executive Order to “remove” VAT on residential properties through Value Added Tax Act (Modification) Order. As laudable as this may be, it creates yet an impression that VAT is applicable to real estate and property transactions, and in this instance, to commercial properties.

Conclusion

In the final analysis, until the Court of Appeal or the Supreme Court rules otherwise on this issue, we remain of the view that only taxable goods and services are subject to VAT. Transfers of title to land not being a supply of goods or services cannot be described as “taxable goods” or “taxable services” and as such cannot be liable to VAT. This is evident from the judicial pronouncements in Momotato’s case and by analogy in the CNOOC’s case. Based on the definitions of “goods” and “services” as contained in the Lagos State Sale of Goods Law and the Black’s Law, we also understand what constitutes goods i.e. movable and detachable items.

Land or real estate are inherently fixed immovable asset and by its very nature un-detachable. They cannot either by breadth of imagination or stroke of pen be reconstructed as goods or services. If the government and the taxman’s desire is to get these transactions within the tax net, the right thing to do is to amend the VAT Act.