Japan’s Simplified Consumption Tax System: Benefits, Risks, and Eligibility

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If you are unsure whether Japan’s simplified consumption tax system is right for your business, this article explains how it works, its advantages, and its potential drawbacks.

The Standard Consumption Tax System

Businesses that do not elect the simplified consumption tax system are subject to Japan’s standard consumption tax system.

If you would like to learn more about the standard system, please see our related article:

An Easy Explanation of Consumption Tax for Doing Business in Japan

Who Can Use the Simplified Consumption Tax System?

Not every business is eligible to use the simplified consumption tax system.

In general, the system is available only if your taxable sales during the base period were ¥50 million or less. For most businesses, the base period refers to the fiscal year that ended two years before the current tax year.

Even if your business meets this requirement, you must also submit the required notification to the tax office by the deadline in order to apply the simplified system.

Because the eligibility rules and filing deadlines can be complex, it is advisable to consult a tax professional before making your decision.

Standard vs. Simplified Consumption Tax Systems

Under the standard consumption tax system, the amount of consumption tax payable is generally calculated by subtracting the input consumption tax paid on business purchases and expenses from the output consumption tax collected from customers.

How Input Consumption Tax Is Calculated Under the Simplified System

Under the simplified consumption tax system, businesses do not calculate input consumption tax based on their actual purchases. Instead, a fixed percentage of the consumption tax collected from customers is treated as deductible input consumption tax.

The deemed purchase rate depends on the type of business:

• Wholesalers: 90%
• Retailers and food-related agriculture, forestry, and fisheries: 80%
• Manufacturers, construction businesses, and non-food agriculture, forestry, and fisheries: 70%
• Restaurants and other qualifying businesses: 60%
• Financial, insurance, and most service businesses: 50%
• Real estate businesses: 40%

Advantages of the Simplified Consumption Tax System

It May Reduce Your Consumption Tax Liability

Businesses with relatively low taxable purchases often benefit from the simplified system. For example, professional service firms such as accounting offices typically have high personnel costs, which do not generate input consumption tax credits. As a result, the simplified system may reduce the amount of consumption tax payable.

Accounting Becomes Simpler

Under the standard system, businesses generally need to verify qualified invoice registration numbers on invoices and receipts to claim input tax credits. Under the simplified system, these calculations are much simpler, reducing bookkeeping and administrative work.

Potential Disadvantages of the Simplified System

Once you elect the simplified consumption tax system, you are generally required to continue using it for at least two years.

If your business makes significant capital investments or your sales decrease unexpectedly during that period, the standard system could produce a lower tax liability. In such cases, choosing the simplified system may result in paying more consumption tax.

How to Elect the Simplified Consumption Tax System

To use the simplified consumption tax system, you must generally submit the required notification to the tax office by the end of the fiscal year preceding the year in which you want the simplified system to apply.

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