Value Added Tax (VAT) was introduced in the UAE (including Abu Dhabi) on 1 January 2018 and in Bahrain on 1 January 2019, both at a standard rate of 5 percent. The implementation followed a GCC-wide framework agreement committing all six member states to introduce VAT as a revenue diversification measure. Bahrain subsequently doubled its VAT rate to 10 percent effective 1 January 2022.
GCC Framework
The GCC Unified VAT Agreement, signed in 2016, established the common framework for VAT implementation across the six member states. The agreement set a standard rate of 5 percent, defined the scope of taxable supplies, and identified categories of goods and services eligible for zero-rating or exemption. Implementation timelines varied, with Saudi Arabia and the UAE leading in 2018 and Bahrain following in 2019. Kuwait and Qatar have delayed implementation.
UAE Implementation
The UAE implemented VAT at 5 percent across all emirates, administered by the Federal Tax Authority. The tax applies to most goods and services, with exemptions for certain categories including specific financial services, residential property (first supply), bare land, and local passenger transport. Healthcare and education services meeting certain criteria are zero-rated. The UAE has maintained its 5 percent rate since introduction.
Bahrain Implementation
Bahrain implemented VAT at 5 percent in 2019 and doubled the rate to 10 percent in 2022, making it the highest VAT rate in the GCC. The increase reflected Bahrain’s more urgent fiscal position — the kingdom runs persistent budget deficits and has accumulated significant public debt relative to GDP. Essential food items, construction of new residential properties, and certain other categories are zero-rated or exempt.
Revenue Impact
VAT has generated significant new government revenue for both countries. For Abu Dhabi/UAE, VAT contributes to federal revenue diversification but represents a smaller proportion of total government income given the scale of hydrocarbon revenues. For Bahrain, VAT revenue is proportionally more important to fiscal sustainability given the kingdom’s limited oil income.
Business Impact
VAT introduced compliance costs for businesses in both jurisdictions, including system upgrades, accounting changes, and ongoing reporting requirements. Small businesses below registration thresholds are exempt from mandatory registration.
Role in Vision 2030
VAT implementation directly supports the fiscal sustainability objectives of both Vision 2030 programmes. Both visions identify diversification of government revenue away from hydrocarbon sources as essential for long-term fiscal health. VAT provides a broad-based, predictable revenue stream that reduces government dependence on volatile oil prices — a structural change both visions explicitly advocate.