Latest changes to the Japanese consumption tax: rate increase and taxation of digital services

Abstract

According to the Law for the Comprehensive Reform of Social Security and Consumption Tax (hereinafter ‘Reform Law’) enacted in August 2013, the Japanese Consumption Tax (JCT) rate increases in two steps: from 1 April 2014, it increased from 5% (4% for national tax and 1% for local tax) to 8% (6.3% for national tax and 1.7% for local tax), and from 1 October 2015, it will increase to 10% (7.8% for national tax and 2.2% for local tax) after assessing the economic situation (The Reform Law §25 and §3). The main purpose of the Reform Law is not only to increase the tax rate but also to earmark the revenue from consumption tax for social security (Reform Law §1). The revenue from JCT is applied in relation to four forms of social security: pension, medical services, elderly care services, and measures to prevent the decline of the birth rate. This fixing of JCT allocation has often been criticised because earmarking revenue from the major tax for a certain purpose leads to inflexibility in terms of financial policy. Since the 2008 Fiscal Year (hereinafter ‘FY’), the revenue from consumption tax has been the second largest of all taxes, as Diagram 1 overleaf shows. As a matter of fact, revenue from JCT has been used for social security since 1997, when the tax rate increased from 3% to 5%, not by the law but by the general rule of budget, on which the Diet’s decision regarding the budget for each FY is based. With the comprehensive reform in 2014, the earmarking of revenue from consumption tax now has a formal legal basis. It is not common policy of the OECD countries with VAT/GST to earmark revenue from a major tax for a certain purpose. However, it was a political compromise for the Japanese government in order to reach a social consensus on increasing the tax rate. At present, one major issue under consideration is the introduction of a reduced tax rate. The coalition government (the Liberal Democratic Party and New Komeito) has already decided to abandon the single tax rate system and to introduce a reduced tax rate when the standard rate increases to 10%. In June 2014, the Tax Commission of the Liberal Democratic Party presented a list of eight patterns to which the reduced tax rate will be applied. According to the list, a reduced rate will be applied to just food, not other goods or services. However New Komeito, which is supported by a large religious group, is pressing the Liberal Democratic Party to apply a reduced tax rate to newspapers and magazines in order to support the right to access to information.