This article examines the current VAT treatment of public sector bodies and non-profit organizations (including charitable organizations) and outlines alternatives to that treatment, focusing on developing and transitional economies. Specifically, the article (a) describes the current VAT treatment of the goods and services supplied by public sector bodies and non-profit organizations, (b) discusses and assesses the alternative treatments that have been proposed in the literature as well as country experience with them, (c) reviews the tax policy constraints facing developing and transitional economies, and (d) identifies the VAT issues specific to the public sector bodies and non-profit organizations operating in developing and transitional economies and assesses the policy options that appear feasible in that context. The conclusions are laid out in the last part.