VAT Guide to Value Added Tax - sri lanka inland revenue ...

Chapter – 19
Mortgages
19.1 Mortgage loan is not liable to VAT because it is a financial service that is exempted.
Item (xi(g) of the First Schedule. Any fees paid to a bank for the supply of a mortgage
facility is a supply of a financial service and is exempt from VAT. Mortgage loan
installments are also exempt from VAT
19.2 If the mortgagor (the debtor) has defaulted and the mortgagee i.e the lender (Bank or the
Financial Institution as the case may be) has auctioned the property mortgaged in
satisfaction of the debt following supplies can be identified.
19.3 If the lender sells the property after the property gets vested in the lender in terms of
some written law then:-
• vesting of the property in the lender is a supply form the defaulting mortgagor to
lender. The consideration for the supply is the settlement of debt.
• Sale by auction is another supply.
19.4 Vesting
* If the mortgagor (ie. the debtor) is a registered person he must charge VAT on
the Bank or the financial institution as the case may be and declare that amount
as output tax It is input tax in the hands of the bank/financial institution.
• The “value of supply” on which VAT is calculated will be the amount of the loan
settled by vesting. The “time of supply” i.e the time at which the liability arises
will be the time the loan is settled. This may perhaps be a date after the auction.
19.4 Sale by Auction
The Bank must charge VAT on the buyer calculated on the sale price and declare it as
output tax.
19.6 The property cannot be treated as a sale of an asset used in an exempt activity by the
bank/financial institution because the lender Bank became the owner of the asset only at
the time of vesting. It is in fact not used by the lender in any activity whether exempt or
not. The possibility is that the original owner (mortgagor) would have been using it in his
taxable activity until it was vested in the bank
19.7 The auctioneer is liable on the commission if he is registered. He should charge VAT on
the bank declare it as output. It is input tax in the hands of the bank.
19.8 Sale of pawned articles too will be treated in the same manner.
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