V. Consumption Tax
Consumption tax is an indirect tax that is widely and impartially imposed based on consumption. It is imposed on transfers of goods, loans, services and imports of foreign cargos carried out by business enterprises in the ordinary course of business in the domestic market. Exports and certain services to non-residents are taxed at a zero rate. Some particular transactions, such as sales or lease of land, sales of securities and provision of public services, are not subject to consumption tax.
Note that pursuant to the 2015 Tax Reform, electronic commerce provided on or after October 1, 2015 such as distribution of electronic book, music, advertisement (digital service) is a taxable transaction subject to consumption tax even if provided by foreign entities.
The consumption tax is added to each selling price each time products are sold at each stage of production and distribution. It is consumers that ultimately bear the consumption tax.
■Tax Rate
The consumption tax rate will increase from 8% to 10% on October 1, 2019.
|
April 1, 2014 ~ September 30, 2019 |
October 1, 2019 ~ |
October 1, 2019 ~ Reduced tax rate |
|
|
Consumption Tax |
6.3% |
7.8% |
6.24％ |
|
Local Consumption Tax |
1.7% |
2.2% |
1.76％ |
|
Total |
8.0% |
10.0% |
8.0％ |
In response to the increase, lower consumption tax rates on certain goods will be introduced. The lower consumption tax rate of 8% will apply to food and beverages, except for alcoholic drinks (excluding when purchased in restaurants) and dining out, and newspapers published more than twice a week (based on a subscription contract).
■Taxpayer
|
Taxpayer |
|
|
Domestic transactions |
Enterprises (individual businesses and corporations) conducting taxable transactions |
|
Import transactions |
Individuals and corporations removing foreign goods from a bonded area. |
■Calculation of Payment Tax Amount
The basic formula to calculate the consumption tax is as follows:
| Tax Due = |
Total Amount of Consumption Tax on Sales x 8% (or 10%) |
－ |
Total Amount of Consumption Tax on Purchases x 8% (or 10%) |
■Deduction of Purchase Tax
Consumption tax on purchases may be deducted from consumption tax on the taxable base. However, the amount of this deduction is limited depending on the percentage of taxable sales. To deduct the consumption tax on purchases, both account ledgers and invoices that describe certain matters have to be retained.
For the prescribed cross-border supplies of electronic commerce such as distribution of electronic book, music, advertisement (digital service) by foreign enterprises, only the consumption tax on the purchases that are subject to the reverse charge system and the purchases that are received from the registered foreign enterprises can be deducted.
Note the invoice system as described below will be applied because of the introduction of the reduced consumption tax rate on October 1, 2019.
■Invoice System
Due to the introduction of the reduced consumption tax rate on October 1, 2019, an invoice system will be applied starting October 1, 2023.
Between October 1, 2019 and September 30, 2023, the accounting ledgers and invoices indicating tax rate categories for separate accounting and items of which are subject to the reduced tax rate have to be retained. After the introduction of the invoice system, qualified invoices issued by registered taxable enterprises need to be retained for purpose of claiming credits of consumption taxes paid. Enterprises (other than exempt entities) will need to file an application with their tax office to be able to issue qualified invoices. The invoices shall indicate details such as but not limited to the business registration number, the applicable tax rate, etc.
■Measures to Facilitate Calculation of Tax
<Exemption Threshold for Business>
An enterprise that has taxable sales of not more than 10 million for the Base Period* and meets certain conditions is a tax-exempt enterprise if the enterprise doesn’t make the election to be a taxable enterprise. Please note that this tax exemption is not applicable to an enterprise that has no Base Period, such as a newly established company with a capital at the start of its taxable year amounting to 10 million yen or more. Also an enterprise that has taxable sales which is more than 10 million yen for the period of the first half of the previous business year cannot be a tax-exempt enterprise during that taxable year.
(*) Base Period: The fiscal year that is two fiscal years prior to the current fiscal year for a corporation.
<Simplified Tax System>
An enterprise that has taxable sales amounting to not more than 50 million yen for the Base Period can elect to apply the simplified tax system. Under the simplified tax system, the tax liability is calculated based on the taxable sales amount only.