A reduced tax rate system for consumption tax will be implemented simultaneously with the consumption tax rate hike to be
scheduled on October 1, 2019.
History of Japan’s Consumption Tax
In 2012, the lower house of the Japan diet passed a bill that increased the consumption tax rate to 10%. At the time, the consumption tax rate was 5% ― made up of the national consumption tax (4%) and local consumption tax (1%). This rate was put in place in April 1997 under the government of then-prime minister Ryutaro Hashimoto.
17 years later, the lower house under then-PM Yoshihiko Noda passed a bill that gradually doubles Japan’s consumption tax to 10%. Under this bill, the tax would be increased to 8% in April 2014, and then to 10% in October 2015. During the Abe government, consumption tax was increased to 8%, as scheduled, last four years prior. However, due to Japan’s economic situation, the increase to 10% was delayed twice. This pushed the tax increase to October 2019.
An Overview of Japan’s Current Consumption Tax
Currently, the consumption tax is levied on domestic and import transaction, with the exception of certain transactions deemed non-taxable. The tax rate is currently 8%. It consists of the national consumption tax (6.3%) and the local consumption tax (1.7%).
The Reduced Tax Rate System for Consumption Tax
Beginning October 1, 2019, Japan will simultaneously implement a reduced tax rate system for consumption tax together with the consumption tax rate hike to 10%.
The new, standard consumption tax rate (10%) is broken down into the national consumption tax (7.8%) and the local consumption tax (2.2%). The reduced tax rate (8%) on the other hand, consists of the national consumption tax (6.24%) and the local consumption tax (1.76%). (National Tax Commission)
Items Subjected to the Reduced Tax Rate System for Consumption Tax
Food and drinks, excluding alcoholic drinks and eating-out services, as well as newspapers issued more than twice a week (based on subscriptions) are subjected to the reduced tax.
“Food” in this case is defined as that used for human consumption (goods provided for human eating or drinking), as provided in the Food Labelling Act. (National Tax Commission; Ministry of Finance) Generally speaking, the items listed below are eligible for the reduced tax rate:
- Food and drinks (goods provided for human drinking or eating), including:
- Foods and drinks provided at fee-based home for the elderly, school lunches, etc.
- Combined products (where food is sold together with other non-food products) if:
- The price of the product, excluding tax, is less than 10,000 JPY; and
- 2/3 or more of the price relates to food (if the price of the combined product alone is posted)
Items Not Subjected to the Reduced Tax Rate System for Consumption Tax
Other items relating to human consumption (eating and drinking) are not eligible for the reduced tax rate system. These include:
- Liquors defined in the Liquor Tax Act;
- Drugs and quasi-drugs;
- Eating-out services;
- Catering and cooking services; and
- Combined products not falling under the specifications listed previously.
Eating-out services are food and drink services business entities provide to customers at sites with dining equipment designed for such services. The dining equipment mentioned includes tables, chairs, and counters.
Catering and cooking services are food and drink services provided at sites designated by customers.