Application of Reduced Tax Rate for Consumption Tax and Q&A Administration
Professor, Faculty of Commerce, Chuo University
Areas of Specialization: Tax Law and Tax Accounting
1. Application of the reduced tax rate for consumption tax (8%)
The consumption tax rate will be increased on October 1, 2019.
In conjunction with this consumption tax increase, the tax rate will be revised from 6.3% (total rate of 8% including local consumption tax) to 7.8% (total rate of 10% including local consumption tax). Another noteworthy aspect of the increase is that a reduced tax rate will be introduced. The reduced tax rate is applied to food and drinks excluding liquors and eating-out services, as well as to subscription newspapers published twice a week or more. As a special exception, a reduced rate of 6.24% (total rate of 8% including local consumption tax) is applied to the aforementioned items. The Japanese system of reduced tax is modeled on the system of value added tax in Europe. In the value added tax system, items such as food, tap water, pharmaceuticals, magazines, newspapers, and movie tickets are eligible for reduced tax rates or are tax free. In October, Japan will introduce a similar system for the first time. Recently, Japanese news programs frequently report on how businesses are hurrying to update software and replace cash registers in order to support the new tax rates.
Legal regulation of food and drinks eligible for the reduced tax rate in Japan is simply defined as food listed in the Food Labeling Act (excluding liquors). (Partial Revision of Income Tax Act, Act No.15 of 2016, Supplementary Provisions No. 34.).
2. Definition of eating-out services
It is often pointed out that consumption tax is a regressive tax; specifically, that since the ratio of expenditures on daily necessities, etc., in relation to income increases directly as the income of the taxed group decreases, lower-income groups will have a higher tax burden than higher-income groups. Implementation of the reduced tax rate is one method for resolving the problem of the regressive consumption tax. Since there is no reason to approve the application of a reduced tax rate to goods other than daily necessities, the reduced tax rate is not applied to the provision of eating-out services, despite such services consisting of food and drinks. This is because the value of eating-out expenses consists of the meal itself plus service charges. As defined here, the term of eating-out must satisfy the following two conditions.
- (1) Must be in a location with dining equipment (location condition)
- (2) Must include services for eating and drinking by customers (service condition)
Additionally, catering, on-site cooking services, and other services which provide food and drinks to customers at designated places are considered as eating-out in terms of taxation. However, the provision of food/drinks at fee-based homes for the elderly, school lunches, etc., is excluded from the category of catering, on-site cooking services, and other services within the scope of eating-out. This exclusion is based on the recognition that it would be difficult to eat meals in another format within such living spaces. Therefore, the aforementioned exceptions are included in the category of food and drinks.
To give some specific examples, food and drinks consumed inside of a pizza shop are classified as eating-out (consumption tax 10%), but if those food and drinks are delivered to a residence, they are classified as food and drinks (consumption tax 8%). Food and drinks consumed in a food court are classified as eating-out, but food and drinks brought from a street stall are classified as food and drinks. Moreover, suppose that a customer buys bread, rice balls, and tea at a convenience store. If the customer eats the rice balls and tea in the convenience store, they are subject to a tax of 10%. However, if the bread will be consumed at home, it is subject to consumption tax of 8%. After the new consumption tax is implemented, part-time workers at convenience stores will have to ask the customer where each product will be consumed. This may prove difficult for part-time foreign workers who lack fluency in the Japanese language, and for part-time student workers who are inexperienced in their jobs.
Source: Homepage of the Ministry of Finance
3: Q&A published by the National Tax Agency
The situation described above will cause confusion for ordinary taxpayers such as manufacturers, sellers, and consumers. Therefore, the National Tax Agency has published a Q&A which explains how to handle the reduced tax rate.
For example, the reduced tax rate does not apply to food and drinks at street stalls which satisfy the following conditions.
- (1) When the stall operator sets up dining facilities such as tables, chairs, counters, etc.
- (2) When the stall operator does not set up facilities, but receives permission to use facilities from the vendor that sets up the facilities.
Conversely, the reduced tax rate applies at street stalls which satisfy the following conditions.
- (3) When there are no tables, chairs, counters, etc.
- (4) When there are tables, chairs, counters, etc., but said facilities can be used by customers without the need for special permission, and can also be used freely by other people as well (for example, benches and other facilities in public parks, etc.)
On a different note, suppose supermarkets with a food court find it troublesome to confirm which items will be consumed within the supermarket, and decides to post signs asking customers to refrain from eating and drinking in the supermarket, and treat all goods as take-out. You may assume those supermarkets will be able to apply the reduced tax rate of 8% to all goods without bothering to ask customers. According to the Q&A published by the National Tax Agency, rest areas which actually do not allow customers to consume food and drinks are considered to be different from a food court and are not considered as eating-out facilities. However, even if the rest areas have signs posted asking customers to refrain from eating and drinking, the Q&A states that rest areas, etc., which actually allow customers to consume food and drinks are considered to be serving food and are not subject to the reduced tax rate, and therefore, it is necessary to determine whether or not items are eligible for the reduced tax rate through methods such as checking the customer's intent to consume items in the facility or to take the items home.
Furthermore, even in regards to selling coffee tickets, when supplying coffee to a customer using a ticket, the Q&A states that the same approach as described above must be taken.
In another example, consider a vendor who sells flower baskets (presented at funerals) as a set for 20,000 yen. Assume that the flower basket contains fruits, sweet cooking sake (mirin), and Japanese sake. Mirin with alcohol is a liquor, so it is taxed at 10%. Mirin-flavored seasoning is taxed at 8%. A tax of 10% is applied to flower baskets taken to funeral parlors, while a tax of 10% is applied to a rented basket...and so on. Furthermore, if some simple additions are made at the request of the customers, the basket is now classified as an "integrated asset(Note)." This makes it difficult to freely respond to requests from customers. For such reasons, many vendors are expressing concern regarding the application of the consumption tax rate.
(Note) Integrated assets are items sold as a set of foods and assets other than foods. (Since the set forms a single asset, the reduced tax rate (8%) is applied to the entire set when all of the following conditions are satisfied.)
- The transfer value (value excluding tax) of the integrated asset is 10,000 yen or less.
- The food value is at least two-thirds of the total value of the integrated asset.
When considering the complexity of the cases introduced above, it seems probable that the National Tax Agency will need to release a series of new Q&A documents.
4. Development of Q&A administration
The Q&A published by the National Tax Agency has made Japanese citizens aware of the matters introduced in this article. The Q&A was issued because of the following requirement: "The government will work to make full preparations to avoid confusion when the reduced tax rate system for consumption tax is implemented and operated, will raise awareness among consumers regarding said system, and will offer consultation to business operators on how to prepare" (Article 171 of the Supplementary Provisions to the Revised Consumption Tax Act). There is no reason to criticize the act of Q&A being issued by the National Tax Agency in order to clarify handling among ordinary taxpayers.
However, during actual business, the National Tax Agency's Q&A which provides multiple specific case examples exerts extremely strong guidance. The Q&A are not laws and therefore have no legal binding power; yet they have extreme strong influence in actuality. In the future, professionals such as accountants will constantly refer to the Q&A as business guidelines each time that the National Tax Agency's Q&A is updated. In all likelihood, it will not be possible to perform tax work without an understanding of the Q&A, and the Q&A will come to possess binding power in actuality. (In fact, each time that a Q&A has been released on the reduce tax rate, training has been held by numerous accountant associations and other organizations, and the market is overflowing with texts interpreting the Q&A.)
The Japanese constitution states that the people shall be liable to taxation as provided by law (Article 30). According to this philosophy, the liability of taxation can only be enforced through the intention of citizens (only if agreement is received from citizens). This is obvious from how laws are created by the legislature of the Japanese Diet.
Confusion during operations and complexity of administrative processing are frequently pointed out as demerits of the reduced tax rate. However, another demerit is that the principle of no taxation without law is threatened by implementation of Q&A administration which serves as government notifications.
Professor, Faculty of Commerce, Chuo University
Areas of Specialization: Tax Law and Tax Accounting
Katsuhiko Sakai was born in Tokyo in February 1963. He completed the Doctoral Program in the Chuo University Graduate School of Law, and holds a PhD in law. After serving as Professor in the Kokushikan University Faculty of Law, he assumed his current position of Professor in the Chuo University Faculty of Commerce. His current areas of specialization include tax accounting theory and tax law. He also teaches at institutions such as Chuo University Graduate School, Chuo Law School, and National Tax College. His main written works include Startup Tax Law (Third Edition) (Zaikeishouhou Publishing, 2015), Introductory Lecture on Interpreting Tax Law (Koubundou Publishers, 2015), Looking from Trial Examples: Corporation Tax Law (Second Revision) (Okura Zaimu Kyokai, 2017), Catch-Up: Latest Taxation on Virtual Currency (Gyosei Corporation, 2019), Catch-Up: Taxation on Revised Inheritance Act (Gyosei Corporation, 2019), and more.