Relief measures have been proposed to mitigate the Japanese Consumption Tax (JCT) burden on small and medium-sized entities (SMEs) that currently are tax-exempt businesses for JCT purposes but that register under the new qualified invoicing system scheduled to become effective on 1 October 2023 (for prior coverage, see the article in the January 2022 issue of Indirect Tax News). Under the new invoicing system, taxpayers will be required to register and maintain qualified invoices issued by registered suppliers to be eligible to claim an input JCT credit.
Background
Under current JCT law, SMEs with taxable sales in the base period (the period two tax years before the current tax year) of JPY 10 million or less (including foreign entities) are classified as “JCT-exempt entities” and thus exempt from JCT filing and payment requirements unless they voluntarily register for JCT. However, beginning in October, only qualified invoice-issuing businesses will be able to issue qualified invoices to customers and only businesses that receive qualified invoices will be allowed to fully claim/deduct paid JCT. As a result, Japanese SMEs that are JCT-exempt entities may be pressured by customers to elect qualified invoice-issuing business status as a condition to a continuing business relationship.
To ease the pressure and administrative burdens on SMEs and encourage them to register as qualified invoice-issuing businesses, a special measure has been proposed that would allow such taxpayers to elect which of three JCT calculation methods, including a special 20% credit under which 80% of the SME’s JCT liability on taxable sales could be credited so only 20% of the JCT amount would be paid. This relief would be available for the three-year period starting on 1 October 2023 and ending 30 September 2026.
Calculation methods
In addition to the general JCT calculation method, under existing law, taxpayers with taxable sales during the base period under JPY 50 million can elect to use a Simplified Tax System (STS). Based on the recent proposals, taxpayers would be able to select whether to use the general JCT calculation method, the STS or the 20% Special Measure.
To illustrate the impact of selecting one JCT calculation method over the other, assume a corporation has JPY 3.3 million in taxable sales (including 10% output JCT amounts) and JPY 1.1 million in taxable purchases (including 10% input JCT amounts). The following are rough JCT liability calculations (excluding a JCT refund) for each of the three methods:
- General method
JCT payable amount:
Output JCT - Input JCT = JPY 3.3M × 10/110 – JPY 1.1M × 10/110 = JPY 200,000
- STS
Under the STS, the deductible tax is calculated by multiplying the JCT on taxable sales for business types 1 through 6 by the deemed purchase rate (business types 1-6 are: wholesale 90%; retail, etc., 80%; manufacturing, etc. 70%; other types of businesses 60%; services, etc. 50%; real estate 40%). In our example, it is assumed that the corporation is in the service industry, so a 50% deemed purchase rate is applied.
JCT payable amount:
Output JCT - Input JCT × 50% = JPY 3.3M × 10/110 – JPY 3.3M × 10/110 × 50% = JPY 150,000
- 20% Special Measure
JCT payable amount:
Output JCT - Input JCT × 80% = JPY 3.3M × 10/110 – JPY 3.3M × 10/110 × 80% = JPY 60,000
In the example, the 20% Special Measure offers the highest credit rate and simplified calculation process.
Comments
The JCT calculation will be more complicated in actual situations and taxpayers will need to take various factors into account in determining which process to use. With the new qualified invoicing system becoming effective in just a few months, affected taxpayers should understand the new invoicing rules and requirements and begin to look at JCT calculation scenarios to ascertain which is the most beneficial method.
Kenichiro Kishi
Huaxue Li
BDO in Japan
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