Consumption tax
Overview of consumption tax
Entities engaged in domestic transactions and import transactions must file and pay consumption tax in Japan unless they are exempt from consumption tax. These entities include foreign corporations, a branch office of international companies, KK/GK, and sole proprietors.
Consumption tax is similar to VAT (value-added tax), GST (goods and services tax) or sales tax in some other countries, but there are many of unique aspects in calculating the tax amount.
This uniqueness often hinders the implementation of global accounting systems like SAP and Oracle as they need to be tailored to effectively deal with the consumption tax under Japan’s tax law.
The current consumption tax rate is a flat rate of 8%, but the rate was raised to 10% in October 2019 with the introduction of the reduced tax rate for food and beverages.
Type of transaction subject to consumption tax (“C-tax)
Below is a summary of C-Tax categories for typical transactions:
| Transaction | C-tax categories |
| Domestic revenue | Taxable sales |
| Export revenue | Taxable sales (Exempt) |
| Interest income | Tax-exempt sales |
| Sales of land | Tax-exempt sales |
| Dividend received | Non-taxable sales |
| Salary | Non-taxable purchase |
| Medical care and welfare | Non-taxable purchase |
| Import of product | Taxable purchase |
| Domestic purchase of product | Taxable purchase |
| Domestic revenue | Taxable sales |
| 3rd party fee(e.g. consulting fees) | Taxable purchase |
| Rent | Taxable purchase |
| Purchase of fixed asset | Taxable purchase |
Case 1 (Standard case)
| Items | Income statement | C-tax (10%) |
| Domestic revenue | 10,000 | 1,000 |
| Export revenue | 2,000 | – |
| Salary | (5,000) | – |
| Rent | (2,000) | (200) |
| Consulting fee | (1,000) | (100) |
| Profit | 4,000 | – |
| C-Tax (receivable)/payable | 700 |
(Calculation for C-tax)
Output C-tax 1,000 – Input C-tax 300*100% (*1)=700
(*1) The amount of this deduction is limited depending on the percentage of taxable sales calculated by the following formula:
Taxable sales
Tax-exempt sales+ Taxable sales
Case 2 (Tax refund)
| Items | Income statement | C-tax (10%) |
| Domestic revenue | 5,000 | 500 |
| Export revenue | 5,000 | – |
| Salary | (2,000) | – |
| Rent | (2,000) | (200) |
| Consulting fee | (4,000) | (400) |
| Profit | 4,000 | – |
| Purchase of Fixed asset | (3,000) | (300) |
| C-Tax (receivable)/payable | (400) |
(Calculation for C-tax)
Output C-tax 500 – Input C-tax 900*100%=400
Tax exempt enterprises
A new entity with the capital amount of less 10 million yen can choose the consumption tax position as either taxable payer entity or exemption entity. The exemption period is limited to the first two years. From the third year, whether or not the company is required to file and pay consumption tax is determined based on the sales amount of two years ago. In other word, if the sales amount in the first year (e.g. FY2016) is less than 10 million, the company can choose the tax exemption position in the 3rd fiscal year(e.g. FY 2018).
Regardless the tax benefits above for small business, if the company meets a) and b) below during the exemption period, the company is required to file and pay the consumption tax from the following fiscal year.
a) Sales amount for the first 6 month is over 10 million yen
b) Total salary amount for the first 6 month is over 10 million yen