Consumption Tax

Main points

  • The Consumption tax in Japan is working like VAT in Europe, borne by consumers
  • Its rate is 8% from April 2014 and is likely to increase to 10% in October 2019
  • It has to be collected and paid between professionals (B2B transactions)
  • The amount paid during B2B transactions is compensated by the amount collected during sales
  • Price tags have to include the Consumption tax amount

Consumption tax is a national tax levied against the volume of business and through self-assessment. The consumption tax rate was raise to 8% in April 2014, from the previous 5%.  The raise is expected to increase to 10%, but this hike has been postponed twice in 2015 and 2016 and now is expected to reach 10% from 1st October 2019.  It is expected that Japan will then introduce a diversified VAT, with a lower rate of 8% for daily foodstuffs and a number of other essential goods and services.

Domestic transactions subject to consumption tax include the transfer or rental of assets or the provision of services as a business in Japan by an enterprise. Import transactions such as cargo retrieved from a bonded zone are also liable.

Notable exemptions include export transactions and export-like transactions such as international communications and international transport. Capital transactions, financial transactions, and some transactions in the fields of medical care, welfare and education are non-taxable.

[4] JETRO, Taxes in Japan: Overview of Consumption Tax, 2013

Under the Japanese Consumption Tax Law (JCT), small enterprises with taxable sales of ¥10 million or less in the base period (e.g. the period two terms prior to the current tax year) do not need to file a JCT return. This is only an exemption from filing, and as such, tax-exempt companies are still required to pay JCT to the vendor or service supplier when purchases are made.

Likewise, the JCT Law does not prohibit tax-exempt enterprises from charging JCT to its customers. Tax-exempt enterprises are, in effect, allowed to keep the collected taxes minus the JCT on purchases. For some businesses this may result in significant windfalls; although these are subject to corporate income tax.

[5] PWC, Summary of Restrictions on the Use of Exempt Enterprise System for Consumption Tax Purposes, 2012

The Consumption tax has to be collected on all transactions made by companies, even business to business transactions. It means that a company will also pay the Consumption tax when it purchases goods or services for its business activities. But the amount of Consumption tax paid will be compensated with the amount of the Consumption tax collected. Companies collecting Consumption tax in their business activities must file returns and pay only the difference between the amount received and the amount paid during the taxable period.

Consumption tax is due on all incomes deriving from domestic business transactions done by companies. In retail business, price tags will have to include the Consumption tax amount. In a business-to-business environment though, invoices are usually issued with the net value of the service rendered on which Consumption tax is separately applied to result in the total amount due.