This Binding General Ruling (BGR) sets out the Value-Added Tax (VAT) treatment of certain supplies of goods and services made by a municipality to a national or provincial government department under each method of contracting. The BGR does not purport to determine the contractual agreement between the two parties but gives the VAT implications based on the nature of the transaction and the contractual capacity of the parties to the agreement.

According to section 40 of the Constitution, the government of the Republic is constituted as national, provincial and local spheres of government, which are distinctive, interdependent and interrelated. Schedules 4 and 5 to the Constitution set out the powers and functions allocated to each sphere of government. Under section 41(f) of the Constitution, all spheres of government and all organs of state within each sphere must not assume any power or function except those conferred on them under the Constitution.

The Constitution allows national and provincial governments to assign aspects of their legislative or executive powers or functions to a municipality, to move the operational responsibilities to a municipality under an agency agreement or to delegate functions to a municipality. Each method of contracting has VAT implications, which are set out in point 4 of this BGR. However, it should be noted that in a VAT system, government is an end user. Therefore, all spheres of government should pay VAT on goods or services acquired by it.