Understanding the Japanese Consumption Tax and It's Socio-Economic Impact

Taxes are undoubtedly an important factor in any nation, no matter how big or small. It is a major driving force for government expenditures, as well as an important factor in national economic growth. Uninformed individuals may think that all or most taxes are bad. The truth is that having the rate tax percentages should be beneficial to any nation, as long as it is coupled with good policy making and planning spearheaded by the government. Below are several reasons why taxes are important for every country.

One of the primary uses of collecting taxes is revenue generation. Of course, the government requires funds in order for them to implement whatever projects they have planned out. The funds collected from the citizens are used by the government to raise revenues for its various programs that tackle infrastructure, welfare, education, defense, and other programs. Taxes are also important for funding operations of the government, which includes providing salaries to the politicians.

In a way, taxes also impact the behavior of its citizens. With the government dictated tariffs on various items, it drives individuals’ expenditures and buying behavior. A popular form of this is tobacco and liquor taxes imposed on alcoholic beverages and cigarettes. They are in place to discourage people from purchasing such goods. Similarly, importation taxes are meant to protect locally manufactured goods and services should encourage citizens to local products more. Large scale assets such as lands are also subject to specific taxes such as the realty tax.

On a larger scale, the existence of taxes driving the behavior of consumers eventually determined a nation’s economy. This is why bigger nations, with much better economic policies, end up with a better GDP or gross domestic product. Trade policies, government support towards local and foreign businesses are other main drivers that contribute to a nation’s economy.

Lastly, taxes are meant to promote a sense of equality in a nation. The sad truth is that there will always be different social classes present no matter what. Even the richest nation in the world has people living below the poverty line. The purpose of collecting taxes is to provide a sense of equality among the people.

While rates are usually computed as a percentage of one’s income, it doesn’t entitle people from Classes A, B and C to more government benefits just because they paid more. The goal of any government is to appropriately use funds so that Classes D and E may have more comfortable lives through welfare programs. General programs such as infrastructure projects are supposed to benefit everyone and not just the people who paid more taxes.

A Quick Guide: What is the Japanese Consumption Tax Law and Who Are Covered by Consumption Tax Returns?

There are many forms of taxes, and they vary depending on the structure of the government. In Japan, there is a specific law that requires consumers to pay for taxes called the “Japanese Consumption Tax Law”. In other countries, this is called Value Added Tax or VAT. 

By law, the Japanese Consumption Tax Law decrees that business or corporations who earn more than Y 10,000,000 per year or less within a fiscal year are not required to file a JCT return. However. this exemption only applies to the filing of their own returns, and should not exempt the business owner from paying JCT as part of its operational and fixed costs. In short, tax-exempt companies will still pay the amount equivalent to 8% of the base sales JCT to its vendors or suppliers, whether they are exempted from filing JCT returns or not.

Similarly, the law decrees that small business who fall into the JCT exemption are not prohibited from charging JCT to its customers. This just means that the taxes collected by the business are allowed to be kept by the owners. In a way, this policy allows smaller scale business to grow by being able to keep more money for capital until such time that they grow enough to qualify for the filing of JCT returns.

The amount that business is required to pay as part of the Consumption Tax charges is net of the money received as well as payments during the taxable period. This means that the amount already deducts the amount paid for by the enterprise when outsourcing from suppliers. The amount is derived from the operating revenues earned by the company.

More often than not, consumption taxes are lodged into retail businesses’ selling price, so that it is easier to justify the higher pricing. They provided a mindset towards consumers that the goods they are purchasing have such prices due to the tax included. This is not the same when dealing from one enterprise to another, wherein invoices for goods and services are usually issued with the net value of the service rendered; with Consumption tax separately applied to result in the total amount due.

A History of The Consumption Tax Rate Increases Prior to 2014

The story of the Consumption Tax Rate goes back to 1979 when the government led by Masayoshi Ohira started entertaining the idea of adding a tax for consumption. It came to no surprise that this was not welcomed by the people, and was met with a lot of objections. The Liberal Democratic Party’s rally for consumption tax also became a big factor in their loss in that year’s election. The proposal was met with a lot of disagreement from the public, It was only ten years later when Japanese politician Noboru Takeshita successfully gained the support of different sectors in order to come up with a policy relating to consumption taxes.

In 1989, the first Japanese Consumption Tax law was passed. This was supported by various sectors of society: the politicians, bureaucrats, business owners, and labor unions. The amount charged as Consumption Tax for goods and services amounted to 3% only at the time. That rate remained to be the same for the next eight years.

However, it was in 1997 when Japan saw the first increase in Japanese Consumption Tax rates. Rallied by the government leader Ryutaro Hashimoto, the 3% rate rose up to 5%. The 2% increase was factored in such that the additional 1% add up to the original 3%, amounting to a total of 4% national consumption tax. On the other hand, the 1% goes to the local government as part of the local consumption tax. Unfortunately for Hashimoto, 1997 was also the year of the Asian recession brought about by the widespread financial crisis.

Japan was one of the nations that were affected by the 1997 recession. A lot of the citizens blamed the financial crisis on the consumption tax increase. It was seen in such a negative light that politicians felt the need to ban discussing the JCT. For the next eight years, the rate of the JCT remained at 5%, not experiencing any increases during that period.

In 2005, the elections allowed Junichiro Koizumi to take the government’s highest seat. Prior to landing the top seat, he was firmly against increasing the tax consumption rate, and he gained a lot of supporters along the way - leading to his massive victory in that year’s election. However, things took an 180 degree turn when he immediately lifted the ban on discussing the Consumption Tax right after he won. In essence, lifting the ban on discussing consumption taxes would mean that the policy making body has the right once again to increase the taxes. This allowed the predecessors of Koizumi to, later on, discuss increasing taxes, namely: Shinzo Abe, Yasuo Fukuda, and Taro Aso.

In 2009, the Democratic Party of Japan overturned the Liberal Democratic Party on the highest government seat. Under Yukio Hatoyama’s leadership, he led the promise to postpone increasing consumption taxes for another four years. However, his predecessor Naoto Kan rallied for an increase in consumption taxes, which was later on supported by the lower-house of the Japanese diet. Hence, a bill was passed which doubled the consumption taxes to 10%.

2014 - Present: Japanese Consumption Tax Now

Despite having the bill passed in 2012 to double taxes, it was harder to implement due to Japan’s fluctuating economic situation. Instead, by 2014, the consumption tax rate was raised to only 8$, with an impending increase to meet the 10% target tax rate by 2014. however,  as issues related to Japan’s economy continued to plague the nation, the target to raise the consumption tax rate by 2014 was never met.

Instead, the government postponed implementing the consumption tax rate of 10% to 2017, as a result of more looming financial issues encountered by the government. Come 2017, another postponement was announced prior to the target date of April 2017. The second announcement moved the consumption tax increase further to October 2019, with no current news whether it will be postponed further.

A Benefit for Foreigners: Japanese Consumption Tax Refund and Exemptions

By law, foreign nationals who are visiting Japan temporarily are considered as noncitizens, and therefore eligible for tax exemption. However, their exemption comes with specific kinds of conditions - particularly, the consumption tax exemption is limited only to common goods (or commodities) and other consumable items. These are classified as items that are deemed as basic living needs.

Of course, tourists usually take the opportunity to bring home Japanese goods. Given that, goods purchased but taken out of Japan are still subject to the exemption. However, there are certain conditions when exempting goods purchased by foreigners. Primarily, there is a minimum purchase limit, as well as a maximum limit on the amount purchased. It is important to note that, commodities and consumable items are tallied separately.

Those who are planning to hoard items from Japan must carefully note what kind of items they are allowed to purchase. For one, only consumer electronics, jewelry, watches, clothing, bags, and shoes are covered by the exemption. The law states that a non-Japanese citizen must be able to take out the goods purchased within 6 months, and the goods must amount to more than Yen 5,000 on a single store. Most important thing to note about tax exemptions is that a photocopy or picture of the passport is taken when the total amount purchased reaches Yen 1,000,000. This serves as a reminder for tourists to always bring his or her own passport while shopping.

On the other hand, consumable items include food, beverages, cosmetics, and cigarettes. However, there is a firm upper and lower limit for non-residents who are buying such goods: a foreigner must purchase more than Yen 5,000, and only up to Yen 500,000 at a single store, on the same day. These items must be taken out of Japan within 30 days, and most importantly, they must be kept unsealed prior to departing the country.

Foreigners who want to save money may visit tax-free shops, which as the name implies, offer tax exemption. There is a specific procedure, which is required for foreigners who wish to be tax exempt. It is important to note that tax exemption procedures must strictly be done on the day of the purchase, as stated by Japanese laws.Travelers may opt to get an exemption through two possible ways. 

When goods are purchased with consumption tax already lodged in, a frequent practice by Japanese retailers, the customer may opt to bring receipts and the credit card used to pay (if applicable) to a dedicated tax exemption service counter. Usually, the people in charge of these counters just make the buyer sign a couple of formal documents indicating submission and receipt of tax refund in the form of either cash or credited back to the credit card.

The scenario is similar, only expedited when purchasing from tax-free shops. There, the stores have already deducted the consumption tax from the total, hence the lowered price tags. It is, however, important to bring a passport as proof that the buyer is not a Japanese citizen. The paperwork required is still the same, and the documents signed must be submitted to the customs office dedicated to transmitting Records of Purchases, located at the departure areas of airports.

The document represents a pledge that the items purchased inside Japan will not be consumed before departure and that consumable items will be brought out of Japan within 30 days. This form is usually signed by foreigners after every transaction with a Japanese store.

Prior to traveling to Japan, it would be good to research the kinds of forms that tax exemption would require - this would ensure a smooth traveling and shopping experience. One must also note that English is not a common form of communication in Japan, and hence, it is really better to do prior research on tax exemption processes. The first form that shops usually as to sign is a Record of Purchase from the shop where the goods were purchased. This specific form is attached to the buyer’s passport and submitted to customs prior to departing Japan. It is important that this form must be kept at all times, because losing it may lead to the voiding of the tax exemption.

The last bit of information that tourists must know is where to find tax-free stores. Since these shops are licensed by the Japanese taxation office, they are legally allowed to sell items at a price without the 8% consumption tax. Usually, a quick Google search would provide a list of tax-free shops. However, they can easily be spotted as well which walking around - tourists must simply look for shops that show stickers or flags of "tax-free signs" with a seal of the Japan Tourism Agency.