The Tax Appeal Tribunal sitting in Lagos has upheld an appeal by a real estate firm, Ess-ay Holdings Limited, against an order of value-added-tax (VAT) re-assessment by the Federal Inland Revenue Service (FIRS).
Ess-ay Holdings engages in the development of real properties which are usually rented or leased to tenants for both commercial and residential purposes.
Following a tax audit, the FIRS in a letter dated October 19, 2018, informed Ess-ay Holdings of its intention to assess the firm’s additional taxes particularly the VAT on incomes derived from letting out its properties for the 2014 – 2016 accounting years.
Following this development, the real estate firm and the FIRS held several meetings to reconcile the differences, however, these meetings ended in futility as the FIRS subsequently issued another letter of VAT re-assessment to the company which they objected to.
According to tribunal sheets sighted by The Street Journal, the appellant, Ess-ay Holdings filed the appeal based on three grounds.
The VAT assessment in the sum of N54, 263, 899.50 (Fifty-four Million, Two Hundred and Sixty-Three Thousand, Eighth Hundred and Ninety-Nine Naira, Fifty Kobo) as Value Added Tax (“VAT”) on rental income earned by the Appellant in the period 2014 to 2016 thereby unlawfully subjecting the rental income of the Ess-ay Holdings to VAT contrary to the provisions of the Value Added Tax Act as amended and currently compiled as Cap V1, Laws of the Federation of Nigeria 2004.
The FIRS erred in law when it issued a Notice of Refusal to Amend VAT Additional Assessments dated 22 July 2019 (“NORA”) where it stated that “income from commercial rent is VAT-able income and the one from residential has administrative exemption”.
The Information Circular No. 9701 issued by the Federal Inland Revenue Service dated 1 January 1997 and captioned “Detailed List of Items Exempted from Value Added Tax (the “Circular”) and upon which the FIRS based its decision to impose VAT on the rental incomes of the Ess-ay Holdings is ultra vires, null and void to the extent that it purports to subject commercial rents to VAT.
Counsel to Essa-ay Holdings, Emeka Ihebie, Esq., drew the attention of the Tribunal to the provisions of sections 46 and 2 of VAT Act and submitted that rents on commercial real properties amount to supply of goods for the purpose of VAT in Nigeria same not being exempt by the provisions of sections 2 and 46 of VAT Act.
Relying on section 3 of the VAT Act, he asserted that while letting out of taxable goods on hire or leasing is vatable, the letting of commercial property, unlike residential property, was not exempted in the First Schedule to the Act.
He further submitted that the development of land into habitable and commercial properties as admitted by the Ess-ay Holdings’ witness under cross-examination is the value added by Ess-ay Holding to the land by the firm and that the letting of the taxable development on the land is vatable and captured under the definition of “supply of goods” in sections 2 and 46 of VAT Act.
The counsel cited a number of judicial authorities to the effect that in construing tax statutes and also contended that where a statute mentions specific things, those not mentioned are excluded.
The tribunal in its judgement, on September 10, 2020, took into consideration the meaning of VAT and the supply of goods and services as relates to the VAT Act.
The tribunal said:
“Interestingly, the Respondent (FIRS) did not argue before this Tribunal that the Appellant’s business amounted to a supply of services. The Respondent’s position is that the Appellant (Ess-ay Holdings) was engaged in the supply of goods. Regrettably, that argument does not find favour with the Tribunal for the reason that real properties by their nature are immoveable and incapable of being severed. This defining feature of goods is lacking as an attribute of real properties.
“The Tribunal is of the firm opinion that a lease of real property is a distinct transaction on its own. It is different and distinct from a transaction for the supply of goods or services. This is so because a lease of real property is a transaction for the transfer of an interest or a right (possessory) in the property. The right so transferred, assigned or granted to the tenant is an incorporeal right. Incorporeal rights are cognizable by law though such rights cannot be seen or touched.”
“We, therefore, find that the Appellant’s lease or letting of its real properties does not amount to a supply of goods or services.
“We hold that the lease of real properties does not amount to supply of goods or services,” the Tribunal added.
The Tribunal, therefore, found merit and upheld the appeal filed Ess-ay Holding.