The Japanese Consumption Tax (JCT) is levied for the sale of goods, provision of services, and importation of goods into Japan.
From October 1, 2023, the JCT system will be reformed to introduce a new invoicing system. This new system has specific requirements, and total compliance is expected from businesses.
The requirements for the qualified invoicing system include an application to register as a qualified invoice issuer, strict adherence to the registration deadline, compliance with the new JCT invoice requirements, and retaining copies of the invoice by JCT taxpayers for tax credits.
As a business owner in Japan, you must educate yourself on the new JCT invoicing system and comply with it.
These new requirements will require a transformation in some aspects of your business to be able to incorporate the appropriate system suitable for its implementation.
The JCT law will be effective from October 1, 2023, and you should set everything in motion before then. Tax compliance requirements can be quite complicated for businesses.
Therefore, this article will detail the Japanese Consumption Tax, the requirements for the qualified invoice system, and how you can better prepare for it.
What is the Japanese Consumption Tax (JCT)
The Japanese Consumption Tax (JCT) is a tax levied on business entities for the sale of goods, provision of services, and importation of goods into Japan. The government introduced it in April 1989 to fund the rising social welfare costs due to the aging of the population.
This tax is borne by the final consumers of these goods and services as businesses include it in their prices as part of the cost of the goods/services.
It is equivalent to Value Added Tax(VAT) system implemented by other countries.
The current consumption tax rate is 10%. However, a lower transaction tax rate of 8% applies to food and drinks (excluding alcohol and dining out) and newspaper subscriptions issued twice a week or more.
According to the National Tax Agency, this tax applies to sales that meet the following conditions:
- Transacted in Japan.
- Carried out by a business entity for their business purposes
- Transfer, lease of assets, or the provision of services in Japan.
- Effectuated for compensation.
The taxable period for a sole proprietorship business is from January 1 to December 31, while for corporations, it is their business year.
However, if the taxable sales of a business in the base period are equal to or less than 10 million yen, a business will be exempted from the consumption tax.
The base period here refers to the period determining whether a business is a “taxable person.” For sole proprietorship, it is the second preceding year before the taxable period and the second preceding business year before the taxable period for corporations.
A business is a taxable person and is required to file the final return if:
- The business had taxable sales exceeding 10 million yen during the Base period.
- The business did not have more than 10 million yen taxable sales during the base period but has submitted the “Report on the Selection of Taxable Proprietor Status for Consumption Tax.”
- The business did not have taxable sales exceeding 10 million yen during the Base period, has not submitted the “Report on the Selection of Taxable Proprietor Status for Consumption Tax,” and whose taxable sales for the first six months of the preceding year (before the Tax period) exceeds 10 million Yen.
Consumption tax exemptions
The following businesses are exempted from this tax:
- Activities related to social welfare.
- Medical treatment that falls under public medical insurance law.
- Sales or lease of lands.
- Tuition and examination fees.
- House rental.
- Export transitions.
- Services provided for the aged and persons with disability.
- Childbirth services.
- Services provided for companies outside Japan.
- Sales of securities and similar items.
- Specific activities carried out by the government.
- Transfer of tangible or intangible assets for use outside of the country.
- Monetary transactions such as loans and guarantees.
History of the JCT
Over the years, the JCT has been subject to several changes and hikes under different administrations. This is to hedge against the rising cost of social welfare caused by the decreasing working population, declining birthrate, and increasing aging population.
A 3% consumption tax was introduced in April 1989 by the administration of Prime Minister Noboru Takeshita during the Heisei era.
In April 1997, it was raised to 5% under Prime Minister Hashimoto Ryūtarō.
In February 1994, an announcement was made to abolish the consumption tax and introduce a 7% national welfare tax, but it was later withdrawn.
A bill was introduced under the administration of Prime Minister Noda Yoshihiko to increase the consumption tax rate to 8% in 2014 and 10% in October 2015. It was approved on August 10 by the upper house plenary session.
Following the approval of this bill, the consumption tax rate was raised to 8% under the administration of Prime Minister Abe Shinzō.
The subsequent increase scheduled for 2015 was postponed by 10 months by the Prime minister—moving it from October 2015 to April 2017.
However, another postponement of the hike was announced by the Prime Minister. It was scheduled to increase to 10% in October 2019.
As scheduled, the 10% current rate hike finally took effect in October 2019. But the 8% rate still applies to certain items such as food and beverages (except for dining out and alcohol ) and newspaper subscriptions.
Introducing the qualified invoice system
A new invoicing system has been introduced to the JCT system called the qualified invoice system. This system will require sellers to issue qualified invoices containing certain information to customers/buyers.
The qualified invoice is a document that a seller issues to the buyer with specific information, such as the exact tax rate and the consumption tax amount of the transaction.
The old system used taxpayers' accounting books to calculate tax liability, which is subject to tax leakages.
With this system, they need to retain copies of the invoice, maintain an accounting book with the necessary information, and file the consumption tax return before claiming the input consumption tax credit.
Some companies and businesses with no consumption tax filing also took advantage of the system to collect consumption tax from their customers.
But under the qualified invoice system, there will be an evaluation of the credibility of the consumption tax.
A non-JCT taxpayer who wishes to register as an invoice issuer will forfeit the non-JCT taxpayer status for a JCT taxpayer status. During the registration, the taxpayer must file an election report to become a voluntary JCT taxpayer.
Effective October 1, 2023, the qualified invoicing system will be implemented in Japan.
This simply means that between October 1, 2021, and March 31, 2023, the registration application for invoiced issuers to the appropriate National Tax office should have been made by the concerned business entities.
Applications to be a registered invoice issuer may be submitted to the appropriate National Tax Office between October 1, 2021, and March 31, 2023. The qualified invoiced system will then take effect on October 1, 2023.
What are the requirements for registered invoice issuers
A registered invoice issuer is a business that has applied to the tax office and is registered as a qualified invoice issuer.
The qualified invoicing system requires the following from invoice issuers.
Adherence to the registration deadline
Application for registration to be a qualified invoice issuer starts on October 1, 2021, and ends on March 31, 2023. Therefore, business entities are required to adhere strictly to this deadline.
After the registration, the name and registration numbers of the invoice issuers can be viewed through the National Tax Agency of Japan website.
Issuance of qualified invoices to customers
Once approved, the qualified invoice issuer must issue qualified invoices to customers who are JCT taxpayers. Non-registered businesses cannot issue qualified invoices.
Inclusion of required information in the invoice
Tax invoices under the qualified invoicing system must contain certain information, and the invoice issuers are expected to adhere to it strictly.
Format and data that needs to be included in the qualified invoice
The table below shows the required information in the qualified invoice and how it compares to the existing invoice.
How can you prepare for the change?
To be prepared for the implementation of this new reform, you should do the following:
- Ensure you meet the deadline for the registration application.
- Update and adjust your accounting bookkeeping system to comply with the new requirement for proper tax calculations.
- Reverse your current invoicing format.
- Inform your business counterparts about your new registration number.
- Enhance your IT and business system to accommodate automated billing methods. You should consider an e-invoicing system that can be easily automated for a streamlined administrative function.
- Organize documents of your business transactions that could be seen as qualified invoices, such as delivery statements, receipts, and bills.
- Connect your business or software to a PEPPOL network system that follows e-invoicing regulations in Japan for a seamless workflow.
- Renegotiate contract terms with third parties while considering the new qualified invoicing system.
The qualified invoicing system requires an application to be a qualified invoice issuer, compliance with the new JCT invoice requirements, and retaining copies of the invoice by JCT taxpayers for tax credits.
These requirements are mandatory to avoid running into problems associated with non-compliance.
However, for a seamless transition to this new system, connect your business to Storecove e-invoicing solutions.
They have the latest formats and e-invoicing regulations for your region. With their API system, you can issue invoices without worrying about your country’s regulatory requirements.
More information about New Japanese Invoicing Requirements for Consumption Tax?
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