HOMEOWNERS will escape paying punitive VAT rates on top of their water charges when bills are issued in early 2015.
Schools, hospitals and sports clubs will also get a reprieve from an increased charge from early next year when Irish Water takes responsibility for issuing bills from councils.
Families faced the prospect of being hit with VAT of 13.5pc because Irish Water was going to be obliged to impose the tax when it begins issuing bills in 14 months' time.
This is because local authorities are exempt from charging the tax for providing water under EU rules secured in the 1970s – but because Irish Water is a private company, it will be obliged to impose a 13.5pc VAT rate which currently applies to other utility bills.
However, Environment Minister Phil Hogan had flagged that he did not favour VAT being imposed on householders, voluntary groups, schools and sports clubs. And the Government decided this week it would exempt everybody from having to pay VAT.
While many commercial customers can reclaim VAT, schools, hospitals and sports clubs cannot.
The Irish Primary Principals' Network (IPPN) said imposing VAT would have placed an enormous financial strain on schools.
Almost half its members paid charges of up to €2,000 a year, while 12pc said they paid between €2,000 and €2,500.
Commercial customers are billed around €200m a year for their water, and the EU/IMF bailout requires domestic customers to pay another €500m a year.
That means an additional €95m could be collected in VAT if applied at a rate of 13.5pc.
Legislation to be published later this year will set out when Irish Water will take responsibility for billing – but it was expected to take control early next year.
Some 90pc of the country's 1.35 million households will start paying water charges from 2014.