The Japanese consumption tax is similar to the European value added tax (VAT) with some significant differences. It was introduced at a rate of 3% on April 1, 1989 and was subsequently revised upward to 5% on April 1, 1997. As of April 1, 2014, the rate was revised to 8%. Further, an increase to 10% was scheduled from April 2017.(*) It is designed as a tax on the sales proceeds of taxable goods and services, less the cost of purchasing those items or services.
(*) Japanese government announced on June 1, 2016 that consumption tax reform to be postponed to October 2019; it will raise consumption tax rate to 10% (currently 8%) and lower tax rate items will be introduced.
Taxpayers—consumption tax return filers, corporations or other business entities—are required to keep well-documented books and records supported by invoices and proper documentation.
Scope of Consumption Tax
There are out-of-scope items, non-taxable items and zero-rate items stipulated by laws, regulations and rulings. However, almost all goods and services that are sold in Japan are now taxed at a flat 8% rate.
- Out-of-scope items
Includes transactions occurring outside Japan, salaries, gifts, donations, dividends, insurance, etc.
- Non-taxable items
Includes sale or lease of land, sale of marketable securities, interest earned, gift vouchers, foreign exchange commissions, school tuition, etc.
- Zero-rate items
Includes exports of goods, international airfare, international communications, etc.
There are various special clauses for small businesses pertaining to election, filing and other matters.
In order to obtain certain tax benefits by making elections, budget information is indispensable to improve decision-making. The timing of filing is important since such elections will bind you for the next two years.
Tax returns are due two months after the balance sheet date and no extension is allowed.