What's Up in 2019

Getting ready for the Japanese consumption tax increase to 10%: Here’s what you need to know

The consumption tax in Japan will be increasing by 2% in October 2019. Here are the tax relief incentives and other details you need to know for everything from daily shopping to buying a car or new home.

When will the consumption tax increase and by how much?

Japan’s consumption tax (shouhizei, 消費税) will be raised from 8% to 10% on October 1, 2019.

When was the last consumption tax increase and what happened?

The last time the consumption tax was raised (from 5% to 8% in 2014), the country went through a brief recession, but the Abe administration sees a commitment to another tax hike as essential for covering exploding medical and nursing care costs due to Japan’s aging population. Part of the tax increase will also go to expanding child care support, including pre-school education.

The planned increase to 10% in October is now a go, after twice being delayed from initial deadlines of October 2015 and June 2016.

The government has a number of policies planned to counteract the expected effect of the tax increase on consumer spending.

Will anything be excluded from the tax increase?

Daily necessities, such as food and newspapers, will be excluded from the 2% increase. So you will still pay 8% for groceries.

However, alcoholic beverages and restaurant meals will be subject to the new 10% rate.

Tax relief for home buyers

The main tax relief measure in the residential real estate sector is a 3-year extension of the mortgage deduction. This is meant to help bolster demand for newly constructed homes, which are subject to consumption tax (re-sale houses and apartments are not).

Other incentives include:

  • Cash back (Sumai kyufukin) incentives for buying a home
  • An increase in the tax exemption limit for monetary gifts (for example, from parents) used to buy a home
  • Introduction of a housing point system to incentivize energy-saving, earthquake-resistance and barrier-free construction

For information on how to claim tax deductions if you are buying a home in 2019, please see: How to claim tax deductions and cash back benefits for home buyers in 2019

Tax relief for car buyers

The automobile tax (jidoushazei, 自動車税) is a local municipal tax paid by car owners based on the volume of exhaust produced by the vehicle. If you buy a car after the consumption tax is increased, you may get as much as a ¥4,500 reduction in your annual automobile tax.

The amount of tax reduction is based on the volume of exhaust displacement:

  • Less than 1.0-L: Current tax: ¥29,500, After tax relief: ¥25,000 (Savings of ¥4,500)
  • 1.0-L to 1.5-L: Current tax: ¥34,500, After tax relief: ¥30,500 (Savings of ¥4,000)
  • 1.5-L to 2.0-L: Current tax: ¥39,500, After tax relief: ¥36,000 (Savings of ¥3,500)
  • 2.0-L to 2.5-L:  Current tax: ¥45,000, After tax relief: ¥43,500 (Savings of ¥1,500)

For a period of one year after the consumption tax increase, car buyers will also get a reduction in the tax charged at the time of purchase. The government will also likely allow for a 1% decrease in the planned “environmental performance ratio” (kankyō seinō wari, 環境性能割) tax that is meant to promote the sales of eco-friendly cars.

2% point back system for cashless transactions

The government will also be providing subsidies to small- and medium-sized retailers to enable them to offer a 2% point-back incentive for cashless purchases using credit cards and e-money (such as, through your smart phone or via QR codes). Basically, if you buy something with a credit card instead of using cash, you will be paying an effective tax rate of 8%, after you receive 2% back from your credit card issuer in the form of reward points.

This measure will only be implemented for a limited time and in particular, is seen to promote spending by inbound tourists by giving them an incentive to pay for purchases with a credit card.

Consumption Tax-Back “Sales”

The government will now lift the ban that was put in place after the previous consumption tax increase on so-called “consumption tax-back sales”. Retailers will be allowed to hold “tax-back sales” by refunding the 2% difference to consumers.

Price tags will show prices including tax

So that the final price will be transparent to consumers, retailers will be encouraged to use price tags showing the price of the item with the 10% consumption tax included.

You may also be interested in: How to claim tax deductions and cash back benefits for home buyers in 2019