Takashi Yamaguchi, English Speaking Japanese Tax Accountant

Tax filing obligation of consumption tax

Most entrepreneurs know that it is necessary to file an income tax return or a corporation tax return once you have started your business or established your company.
Then, what about consumption tax?
Whether or not to be a taxpayer of consumption tax is quite confusing.
I think that there are not many people who know it for sure.

A taxable person and a taxpayer

Consumption tax is the tax on “consumption” as its name indicates.
To be precise, it is the tax imposed on “added value” which is “consumed”.
Therefore, the tax should be borne by consumers.
It is the reason why we should bear consumption tax when we purchase goods or services as a consumer who had consumed (or is consuming) goods or services.

However, even though consumers may bear the consumption tax, they never pay it to the government.
The consumption tax borne by consumers is temporarily retained by individual businesses or companies that have sold goods or services then paid the government from such businesses.
Consequently, a business operator that provides goods or services as “business” like individual businesses or companies is obliged to pay taxes.

Like this, a tax born by a person (taxable person) but paid to the government by the other person (taxpayer) is called an “indirect tax.

Not all businesses become taxpayers

Consumption tax is a general tax widely imposed on consumption.
Accordingly, all businesses are supposed to be taxpayers and should pay the consumption tax collected from the general consumers.
However, with regard to micro-enterprises that a business owner manages everything by oneself, it is anticipated that they cannot afford the administration for tax filing and payment. Therefore, small businesses whose taxable sales for the base period was 10 million yen or less are exempt from tax filing and payment obligation (Article 9 para 1 of the Consumption Tax Law (hereinafter referred to as the “Law”) ).

Tax obligation comes late

The “base period” means the following period (Article 2 item 14 of the Law).

Business operator Base period
Individual business operator a year before last year
Corporation A corporation whose fiscal year is 1 year a fiscal year before last fiscal year
A corporation whose fiscal year is less than 1 year The fiscal year began during 1 year starting from the day 2 years before the first day of the current fiscal year.

“Taxable sales” is the sales amount of goods and services provided in Japan.
You can take it that sales of all goods or services will be “taxable sales” unless the law specifically provides it should be non-taxable.
Non-taxable sales are consideration of transfer of land, securities and interest income, etc.
Export of goods or service provision from Japan to overseas should be included in “taxable sales”.

Whether or not to become a taxpayer for each year (in the case of an individual business operator) or fiscal year (in the case of a corporation) will be judged based on the actual result of the taxable sales of the base period.

There seem to be quite a few business operators who have no idea if they have become taxpayers of consumption tax because they do not know the above system or just do not know the exact amount of their taxable sales.
If a tax accountant has been involved in their tax filing of either income tax or corporation tax, the accountant could have pointed out it.
But if not, it is likely that the business operators do not realize it until he/she has a certain occasion (such as a tax audit).

Many exceptions for exemption

There are many special provisions on the exemption for small businesses.
They are measures to prevent abuse of the exemption rule that is supposed to relieve small businesses from tax administrative burden.
Therefore, some business operators are not exempt from the tax filing and payment obligation even if their taxable sales amount of the base period did not exceed 10 million yen.
For example, if you fall under any of the following cases, you might have already become a taxpayer.

  • The sales amount for the initial 6 months of last year / fiscal year exceeded 10 million yen
  • Succeeded business from other business operators by inheritance/merger/corporate divestiture
  • A newly established corporation with capital or equity contribution of 10 million yen or more
  • A corporation controlled by a parent company etc. whose taxable sales exceed 500 million yen
  • Purchased fixed assets or inventory at a unit price of more than 1 million during the period the business operator had been a taxable business operator.
  • Sales of export transactions (zero-rated transactions) had exceeded 10 million yen
  • Filed a notification to become a taxable business operator to the tax office (this is an obvious case, so you will know it but just in case).

If you have any concerns, please refer to this page as well.

The tax environment for small businesses is changing

In October 2023 the system of tax returns will be greatly changed.
Currently, taxable business operators are filing the tax return based on their accounting records (ledger system) but going to file the tax returns under the invoice system from 2023 onward.
“Invoice” means an invoice or bill.
The invoice system is a tax method adopted in the EU for the VAT purpose to make the taxpayers file a tax return based on the amount of VAT stated on the invoices.
In Japan, we are going to use an invoice called “qualified invoice, etc.” issued by a “registered business operator” registered to the tax office.
Other invoices can not be used for the tax filing of consumption tax.

Under the ledger system, the exemption is granted in consideration of the administrative burden of small businesses that are not able to maintain proper books and records.
Even after the invoice system becomes effective, the exemption for small businesses remains, however, business operators exempt from the tax filing and payment obligation (the exempt business operators) can not be registered business operators, invoices issued by the exempt business operators will not be the “qualified invoice, etc”.
If a business partner is a taxable business operator, invoices issued by the exempt business can not be qualified for their tax filing purpose.
So there is a concern that taxable business operators become reluctant to deal with the exempt business operators.

As a result of such a change in taxation, more small businesses may opt to become taxable business operators due to requests or suppression from their business partners.
I recommend that small businesses proactively streamline accounting functions so that they can fulfill tax filings of income tax or corporation tax and consumption tax as well in efficient manner rather than unwillingly become the taxable business operator.
I believe that you can make it happen together with your tax accountant and good use of cloud accounting.

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