Economic Insight: People are becoming familiar with consumption tax under the qualified invoice system

SATO Motohiro
Faculty Fellow, RIETI

The consumption tax invoice (qualified invoice) system started in October, 2023. Consumption tax payers can deduct consumption tax payments on their purchases from consumption tax collected on their sales. If the consumption tax rate is 10%, for example, a business operator who purchased raw materials at a before-tax price of 10,000 yen and sold a product made from them for 15,000 yen is able to pay only 500 yen in consumption tax by deducting the 1,000 yen paid in consumption tax on the purchase from the consumption tax amount of 1,500 yen on the product sale.

In the past, business operators were allowed to deduct consumption tax on their purchases based on books and bills they kept. Since October, qualified invoices issued by suppliers are required for the deduction.

However, qualified invoices can be issued only by consumption tax payers. If a supplier is exempted from consumption tax due to having annual sales worth less than 10 million yen, the business operator in the above example case may be unable to deduct 1,000 yen in consumption tax on the sale. Therefore, there is concern that business operators may reconsider purchasing from suppliers that are subject to the consumption tax exemption.

For this reason, there is strong opposition to the consumption tax invoice system, especially among sole proprietors and micro-business owners, including business operators which are subject to the exemption. However, even tax-exempt business operators can choose to become qualified invoice issuers and pay consumption tax. According to the National Tax Agency, the number of applicants for registration as qualified invoice issuers stood at 3.7 million at the end of July 2023, including 2.78 million consumption tax payers and 920,000 tax-exempt business operators.

It should be noted that the consumption tax invoice system is applied to business-to-business transactions and has no significant impact on sales to final consumers in stores and restaurants.

European and other foreign countries with consumption tax (value-added tax) systems have introduced qualified invoices without exception. Japan is an exception because it has allowed business operators to deduct consumption tax payments by keeping books and bills. The consumption tax invoice system can serve the interests of micro, small, and medium business operators as well. At the time of the last consumption tax hike, consumption tax payers suppressed purchase prices, affecting their subcontractors. Qualified invoices specify before-tax prices and tax amounts destined to be deducted, making it easier for purchasers to accept any consumption tax hike passed on to purchase prices.

The implementation of the consumption tax invoice system has not necessarily been abrupt. There was a four-year preparation period from October 2019, when consumption tax was raised to 10%, with the tax rate kept 8% on some goods, such as food products. In addition, there will be a six-year transition period where business operators will be allowed to deduct consumption tax on purchases from tax-exempt suppliers to some extent. Furthermore, even if suppliers become consumption tax payers, consumption tax on their sales will be cut by 80% to alleviate the pressures of any drastic changes during the transition period.

Why have so many citizens and business operators felt opposition to or surprise related to the consumption tax invoice system? They might be under the impression that consumption tax is only paid by convenience stores, supermarkets, and other business operators. In fact, however, consumption tax is also imposed on various transactions which affect sole proprietors such as freelancers.

Recently, I have been receiving inquiries from publishers and other business operators about my registration as qualified invoice issuer. As work styles are diverse and include freelance and side jobs, the number of consumers who are business operators who are subject to consumption tax will increase in the future. The consumption tax invoice system may help consumers relate to consumption tax as a personal issue, while making their work more convenient through the diffusion of digital invoices.

>> Original text in Japanese
* Translated by RIETI.

October 21, 2023 Weekly Toyo Keizai

December 22, 2023

Article(s) by this author