Taxing building materials will stifle real estate growth - developers

The 25 per cent tax imposed on construction materials for local investors with a minimum capital of $100,000 in hotels and 10 per cent for projects worth over $1.8m will slow down the impressive growth of the real estate industry, developers have said. The tax is one of the new duties the government proposed in the 2013/14 fiscal year budget. Charles Haba, the president of the Real Estate Association of Rwanda (REAR), noted that while there could be genuine reasons for government to scrap the tax waiver, the move will negatively affect the industry.“Whenever there is a tax increment, the business man automatically transfers the burden to the final consumer. “This hurts demand and affordability, which should be major concern for all of us even the government,” Haba, who is also the Century Group Real Estate Developers managing director, said. He added that there was a need to make the industry competitive.Haba observed that the tax could have been introduced to punish developers who were buying materials reportedly for construction projects but then sell them. The tax proposal comes at a time when there is a need to boost the housing sector which is under-served with an annual demand estimated at over 30,000 units required per year in Kigali alone.Developers who talked to Business Times are worried that ongoing real estate projects that are being funded by bank loans could stall. “The government should have stayed the tax for a few years and instead apprehended those developers found selling tax exempt building materials,” real estate developers, who requested not to be named, said. “We know the importance of paying taxes, however, tax incentives are vital to encourage more investment in the sector,” they said.The developers warned that if the tax proposal is implemented, the cost of houses and rent will greatly increase, making it hard for people to access decent houses. “Imposing a tax on construction material automatically means that people will be buying houses at higher prices,” they noted. Last year, the government proposed a law to impose a 5 per cent levy on construction materials imported from outside the East African Community and the Common Market for Eastern and Southern Africa (Comesa) trading blocs.Early this year, developers expressed concern over the high cost of mortgages, noting that the high rates were threatening the gains achieved by the sector. “With this proposed tax, we don’t know how things will turn out for us and buyers. We hope the government will rethink its position on the proposed tax,” developers said. David Baliraine, an associate director on tax services at Ernst & Young, noted that levying new taxes is a delicate balance between government trying to collect revenue and fund its projects, as well as trying to get its people out of poverty. “The government raises its funding from both domestic and external sources. However, given the challenges it has had with donors, it must look for ways to raise revenue. One of the ways is to impose a tax on things like construction materials. “However, by doing so it is also making the cost of shelter very expensive for those who want to acquire decent houses,” he noted.