On 1 October 2019, Japan raised its consumption tax for the first time in five years. The rate rise has been expected and the government has allocated the extra revenue to a range of social welfare and education programmes, including free childcare and efforts to reduce public debt.
The new rate of consumption tax does not hit all goods and services equally, so businesses in Japan should become familiar with the fine details.
What is the new consumption tax rate?
On 1 October 2019, Japan’s consumption tax rose from 8% to 10%. The new rate applies broadly to almost all goods and services in Japan - which means everything from electronic devices to books. However, some goods and services (mainly food items) will remain subject to the previous rate of 8%. Similarly, certain transactions are exempt from the consumption tax, and rebates for business are available.
What is exempt from the consumption tax?
Specified transactions not subject to consumption tax include:
- Sale of land
- Lease of land
- Sale of securities
- Provision of public services
In these contexts, consumption tax paid by businesses can be credited back when the business files a consumption tax return. Relevant invoices and accounting records must be kept to support the consumption tax return.
Consumers will also be able to access a rebate of 5% when making payments electronically (at some retailers). The 5% rebate will obviously negate the 2% tax rise - a move designed to mitigate its introduction.
How is the lower rate of consumption tax applied?
The lower 8% rate of consumption tax has been introduced for certain goods and services in Japan. The application of the 8% rate applies to:
- Subscriptions to newspapers that publish at least twice a week
- Food - unless that food is purchased in a restaurant or in a context which might the considered “dining out”.
How should consumption tax be applied to food?
The application of consumption tax at 10% to food purchased when ‘dining out’, and at 8% in other contexts is a complicating factor which may be confusing to some businesses.
While food sold in restaurants or cafes counts as ‘dining out’ and is subject to the 10% rate, food sold as takeout is not, and is taxed at 8%. Other complications exist:
- Mirin: The sweet sake, mirin, has more than 10% alcohol and so is treated as an alcoholic drink and taxed at 10%. However, mirin seasoning for use with food (with 1% alcohol) is taxed at 8%.
- Mineral water: Bottled water qualifies for the lower 8% rate, but tap water is taxed at 10% because it has utilities beyond a ‘food stuff’ - it may, for example, be used in washing machines.
- Food with toys: Fast food businesses which package discount meals for children with a toy may apply the 8% rate if the toy is not included in the price of the meal. Other food products bundled with a toy may charge the 8% rate if two-thirds of the total product is food and the total price is not above ¥10,000.
Japan’s National Tax Agency has a number of resources, including an FAQ, for businesses seeking to understand the application of the two rates of consumption tax to food and other goods and services. An invoice system will be introduced from 1 April 2023 to help businesses better manage their consumption tax reporting obligations.
For more information on Japan’s tax system and business landscape, consult activpayroll’s Global Insight Guide to Japan.