Maharashtra finance minister Ajit Pawar has indicated that the state government will provide a waiver on 15 per cent interest as penalty on value-added tax (VAT) levied on property transactions between 2006 and 2010, offering relief to thousands of harried home buyers. The finance department has also said that VATwill be charged only on the cost of building material and not on the cost incurred on labour, engineering, architecture and construction services.

An official announcement will be made only after September 8 since the election code of conduct is currently in force for the gram panchayat elections which will be held on the same day. "We have asked builders to collect VAT in the range of 1-5 per cent from consumers and pay it to the government. Since many builders have not paid the tax yet, the government, in its circular, has demanded that 15% interest should be charged as penalty.

It is clear that for flats and properties bought after April 2010, the VAT is 1 per cent," said a top official in the sales tax department. A delegation of developers will meet Pawar on Tuesday to discuss the trade circular issued by the state government after the Bombay High Court struck down the petition filed by the builders' association challenging imposition of VAT on properties bought between June 20, 2006, and March 31, 2010.

While the court ruling will help the state collect close to . 1,000 crore from this tax, the government is likely to give some relief to consumers by waiving off the 15 per cent interest, said officials in the finance ministry who didn't wish to be named. With the builders demanding more clarity on what's the exact percentage of tax; buyers, who suddenly face the prospect of shelling out more money, are outraged by the decision.

A finance ministry official also clarified that VAT is not on expenses incurred or services required during the construction of a property; it will be charged only on building material. So, the cost of services can be deducted from the cost of property shown in the agreement , which is likely to reduce the taxable amount by about 30 per cent for most flats and bungalows. Meanwhile, builders have already started collecting VAT from flat buyers. Some developers have already created escrow accounts, received bank guarantees , and even taken written undertakings or commitments from customers.

Therefore, they will be able to pay these taxes immediately. "Although VAT is 5 per cent, the final amount effectively works out to 7-8 per cent because of the 15 per cent annual interest and 25% penalty charges. Few builders, who have already collected 5 per cent from customers, will still have to pay a higher amount, which the customer may not agree to shell out.