Japan consumption tax rules

Japan’s consumption tax, known as the “shōhizei” (消費税), is a value-added tax (VAT) applied to goods and services. The current rate is 10%, which has been in effect since October 1, 2019. Prior to that, the tax rate was 8%.

There are some exceptions, like food and beverages, where a reduced rate of 8% applies for certain items, such as groceries. However, restaurant meals and other prepared foods are subject to the 10% rate.

Understanding and complying with these rules is crucial for both consumers and businesses in Japan. For businesses, staying updated on any changes and registering appropriately is important to avoid penalties or complications.

In Japan, businesses are required to register for consumption tax (shōhizei, 消費税) if they meet certain conditions. Here are the key points regarding consumption tax registration:

Who Needs to Register for consumption tax?

  • Businesses with taxable sales exceeding ¥10 million annually (over the last two fiscal years) are required to register for consumption tax and charge the tax on their sales.
  • Businesses whose sales are below this threshold can choose not to register, but they may still voluntarily register for consumption tax if they believe it will be beneficial (e.g., claiming input tax credits).
  • New businesses: Even if a business is just starting, they must register for consumption tax if they expect their taxable sales to exceed ¥10 million in the first two years of operation.

Voluntary Registration

  • Businesses that do not meet the ¥10 million threshold may still choose to register. Voluntary registration is often done if a business wants to benefit from input tax credits (the ability to reclaim consumption tax on business expenses).
  • However, once a business is registered, it must follow all the rules and responsibilities for collection and remittance of consumption tax.

How to Register for Consumption tax in Japan?

  • Application process: To register, a business must submit a tax registration application to the National Tax Agency (NTA).
  • The application form can be submitted to the local tax office where the business is located.
  • Businesses typically need to provide details like their business activities, estimated annual sales, business address, and representative’s information.
  • Once the application is processed, the business will receive a taxpayer registration number and must begin collecting and remitting consumption tax.

Timing of Registration

  • The registration process generally needs to be completed before the start of a fiscal year, or before the business reaches the ¥10 million sales threshold.
  • New businesses should register as soon as they start operations if they expect to reach the ¥10 million threshold.

Obligations After Registration

  • Issuing tax invoices: Once registered, businesses must issue invoices showing the consumption tax separately. These invoices must meet the legal requirements, including a breakdown of the tax amount and the business’s tax registration number.
  • Filing consumption tax returns: Registered businesses must submit quarterly or annual consumption tax returns (depending on the size of the business). The returns report the consumption tax collected on sales and the tax paid on business purchases.
  • Payment to the government: After filing, businesses must pay the consumption tax they owe to the National Tax Agency. The payment is due after the filing period.

Exceptions to Registration

  • Small businesses: Businesses with taxable sales under ¥10 million in the last two years are not required to register. They also do not have to collect consumption tax on their sales or file returns, unless they choose to register voluntarily.
  • Non-taxable businesses: Certain types of activities or businesses are not subject to consumption tax, such as businesses providing medical care or financial services. These businesses do not need to register.

Changes in Registration

  • If a registered business drops below the ¥10 million threshold for two consecutive years, they may apply to deregister. However, businesses that have been registered for more than two years are generally required to stay registered for at least two years.

Penalties for Non-Compliance

  • Businesses that should be registered but fail to do so may face penalties or interest charges on taxes owed.
  • Similarly, businesses that do not file returns, underreport sales, or fail to remit taxes may also be subject to fines and other penalties.

Special Considerations

  • International Businesses: Foreign businesses that sell goods or services in Japan, even if they are located outside of Japan, may be required to register for consumption tax if their sales exceed the ¥10 million threshold.
  • E-commerce: Businesses selling products to Japan through e-commerce platforms must also be aware of their consumption tax obligations if their sales exceed the threshold.

 What is Tax Rate in Japan?

  • Standard rate: 10% is the standard consumption tax rate, which applies to most goods and services.
  • Reduced rate: A reduced rate of 8% applies to certain items, like food and beverages (excluding alcoholic drinks and dining out). Some publications, newspapers, and certain other services also qualify for the reduced rate.

 Exemptions

  • Some goods and services are exempt from consumption tax, such as certain medical services, education, and financial services (e.g., insurance).
  • Exports: Goods and services sold for export are also exempt from consumption tax to encourage international trade.

Who Pays the Tax in Japan?

  • Consumers are the ones who actually pay the consumption tax when they purchase goods or services.
  • Businesses are responsible for collecting the tax from consumers and remitting it to the government.

Business Obligations

  • Businesses that are registered for consumption tax must charge the appropriate tax on sales and issue tax invoices.
  • Registered businesses can deduct the consumption tax they have paid on their business purchases (input tax) from the consumption tax they collect on their sales (output tax). This system is similar to the VAT system in many countries.
  • If a business’s taxable sales are below a certain threshold (currently ¥10 million per year), they may not need to register for the consumption tax or charge tax on sales.

Tax Invoices

  • To claim a tax deduction on business purchases, businesses need proper tax invoices. These invoices must list the consumption tax amount and contain the necessary information, like the seller’s tax registration number.

Online and Foreign Sales

  • E-commerce: The consumption tax applies to goods and services sold online, even from foreign suppliers. For goods sold online from overseas, tax is generally collected if the value of the goods exceeds a certain threshold (currently ¥10,000).
  • Foreign Businesses: Foreign businesses may also be required to charge consumption tax if they are selling goods or services to customers in Japan.

Tax Filing and Payment

  • Businesses must file regular consumption tax returns, typically quarterly or annually, depending on their size.
  • The consumption tax is due to be paid to the National Tax Agency after the return is filed.

Deductions and Refunds

  • Input tax credits allow businesses to claim back the tax they paid on purchases related to their business operations. This prevents double taxation.
  • If a business does not owe any tax or has overpaid, they may be eligible for a refund.

Special Cases

  • Certain small businesses with annual taxable sales under ¥10 million may be exempt from consumption tax registration.
  • There are also special rules for certain types of sales, like real estate or financial services, which may be exempt or treated differently under the law.

What is Changes in Tax Rate in Japan?

  • The consumption tax rate in Japan has increased over time. It was 5% in 1997, raised to 8% in 2014, and then to 10% in 2019. The Japanese government occasionally discusses future increases, but any change requires careful planning and policy changes.

By understanding these rules and the registration process, businesses in Japan can ensure they comply with the consumption tax law and avoid penalties. It’s often advisable to consult a local tax professional to guide through the process, especially for businesses that may be new to Japan’s tax system.