Here's some good news for those eligible to pay value added tax (VAT). The amount is calculated either on the total cost of the construction material or the agreement value of the flat, whichever is lowest. This means contrary to belief, the VAT amount will not run into lakhs.

The average construction cost in Mumbai and its peripheral areas is between Rs1,100 and Rs1,500. "If the flat is 1,000sqft and the construction cost is Rs1,100, the proposed 5% VAT comes to Rs22,000," said Anand Patwardhan, former chairperson of the Consumer Guidance Society. He was clearing the confusion over VAT to 35-odd residents of Lakhani Suncoast co-operative housing society, Belapur, on Sunday.

Patvardhan said many developers blatantly charge VAT on the total agreement value of the flat. "It is wrong. A flat is an immovable property and so VAT cannot be charged. The government charges VAT only on the flat's construction cost. It includes the cost of cement, grills, tiles, etc. There is a particular method to charge VAT and it can be done only as per that," he said.

Swati Kale, deputy commissioner, sales tax, publicity, explains how VAT is calculated. "There are three formulas to calculate VAT. It is calculated on the construction cost and we have also allowed developers to levy it on the agreement amount. However, VAT is charged on the amount which is the lowest; usually it is the construction cost," she told DNA.

It is therefore essential for buyers who have bought flats between 2006 to 2010 to ask their developers about the VAT break-up. "It will help them understand the method used by the developer to charge VAT," Patwardhan said. He said buyers should question the developer if he has registered the VAT they paid with the sales tax department.

"If not, the developer has committed an offence. It is wrongful enrichment. Under section 60 of the state government's Sales Tax Act, the developer will be penalised and the amount collected by him can be forfeited," Patwardhan said.

Vimal Roy, resident of Lakhani Suncoast society, said there is a lot of confusion among buyers over VAT. "No one knows the exact method of VAT calculation. Some buyers are ignorant. To bring more clarity, the government should publish the method of VAT calculation in newspapers. However, it seems the government is hand-in-glove with the developers. It wants the buyers to remain confused so that the developers can reap the benefits of this confusion," he said.

"The method of charging VAT should be more transparent. The central government charges various taxes by giving clear slabs and methods. In this case, there is no clear formula. We need to bring developers, government officials and buyers on one platform to understand the intricacies and impact of VAT," Roy said.