For most businesses, VAT is neutral because, in accordance with the aim that VAT should only be a burden on final consumption, they are entitled to deduct or receive a refund of any VAT incurred in the process of production and distribution of goods and services ("economic activities"). However, for many public entities and "charities", input VAT is not deductible because all or some of their activities as such do not qualify as "economic activity" or are exempt from VAT. In this article, the author reviews the origin of the VAT exemptions, their costs for public entities and charities, as well as their consequences on management decisions, and presents some suggestions for improvement of the Directive.