The real estate sector in Bangladesh plays a vital role in the country's economic growth and development. According to data from the Bangladesh Bureau of Statistics, the real estate sector's contribution to the Gross Domestic Product (GDP) was 7.93 percent in fiscal 2022-23. However, the real estate sector in Bangladesh encounters significant financial challenges in relation to the Value Added Tax (VAT) and mortgage financing. These financial challenges have a profound impact on the operations and sustainability of real estate and land development companies.

Challenges in Value-Added Tax Applicable Value:

Imposing VAT on real estate transactions has become a conflicting and burdensome process for companies in the sector. To resolve this challenge the responsibility for collecting VAT should be exclusively entrusted to the Sub-Registrar Office during the registration of the Sale Deed. No other authority should be involved in VAT collection. By designating the Sub-Registrar Office as the sole authority for VAT collection during the registration process, we can achieve clarity and consistency.

Currently, all companies except 100% Export Oriented Industries are subjected to VAT audits for the past five years, with an interest rate of 2% per month on any unpaid VAT. As per Section 127 of the VAT and Supplementary Duty Act 2012, the interest rate on unpaid VAT should be reduced to 1% per month, effective from the 2019 fiscal year. We urge the government to implement this provision retrospectively, applying it to any period during which VAT remained unpaid. Additionally, the provision stated in Sub-Section (5) of Section 90 of the VAT Act, 2012 should be applied uniformly across all industrial sectors, rather than only to 100% Export Oriented Industries.

Since 2019, under the IFRS-15 provision, real estate and land development companies are required to recognize sales only after completing performance obligations, even if the transfer of "Risk and Rewards" has not occurred under the Sales of Property Act. According to Section 53FF of the Income Tax Ordinance, 1984, income tax must be paid at the time of registration of a particular apartment. The income tax authority levies tax on apartments where the "Risk and Rewards" are transferred, while the tax related to apartments where possession has been handed over but not yet registered is considered as "Deferred Tax Liability." For VAT imposition, the VAT authority should adopt a similar approach, aligning with the existing income tax system.

Limited Access to Mortgage Financing:

Furthermore, the limited access to mortgage financing poses a significant concern for the expansion of Bangladesh's housing market. High interest rates on home loans offered by both government and private banks, difficult mortgage conditions, and the lack of a universal lending system contribute to the affordable housing issue.

Experts suggest that the government should introduce a more logical home loan system, following the pattern of India and other developed countries. Currently, the Bangladesh House Building Finance Corporation, the sole government institution providing home loans, charges interest rates of 8-9%, with a maximum loan amount of Tk2 crore and a repayment tenure of 5-25 years.

Private banks and non-bank financial institutions charge interest rates of 8.99-15% and 8-8.5% respectively. In comparison, home loans are more affordable in India, with interest rates of 6-8% for government-affiliated institutions and 6.7-8.05% for private banks and non-bank financial institutions. The high cost of home loans and difficult eligibility conditions make it challenging for many people in Bangladesh to access financing and own an affordable home, leading to a housing crisis that is expected to worsen as the country's urban population grows.

Addressing financial challenges in the real estate sector is crucial for its growth and sustainability in Bangladesh. Implementing the recommendations discussed above can alleviate conflicts and burdens faced by real estate and land development companies. By streamlining VAT collection through the Sub-Registrar Office, adjusting interest rates on unpaid VAT, and aligning sales recognition criteria with the existing income tax system, the real estate sector can thrive and contribute significantly to the country's economic development.

In conclusion, it is imperative for the government and relevant stakeholders to work together to overcome these challenges and create an enabling environment for the real estate sector to flourish. By implementing these recommendations, Bangladesh can unlock the true potential of its real estate market and pave the way for sustainable growth and economic prosperity.