Monday, December 14, 2015

Consumption tax exemption determined in Japan

In Japan, a remarkable agreement was achieved in the ruling parties about taxation policy, recently.

Ruling Liberal Democratic Party (LDP) and Komeito Party made a decision that all types of foods except alcohol would be subjected to the exemption from expecting rise of consumption tax rate. It will be came into force on April in 2016. The tax rate will be raised from current 8% to 10% in general items.

The Asahi Shimbun: Ruling coalition agrees on exemptions for sales tax hike but fails to settle revenue loss

Hiking the rate of consumption tax is an extremely troublesome issue in politics. Ex-ruling Democratic Party of Japan (DPJ) submitted the bill to hike the rate in 2012. It was approved in Diet, but it became one of the reasons DPJ made a historic defeat in the next general election, leading to give up the administration.

My past entry: Consumption tax will be raised

After that, LDP attempted to raise the tax rate based on the legislation, but to fail, due to a broad criticism by, not only citizens, but also some politicians in LDP, and even DPJ which had drawn the vision. Abe administration decided to postpone the raising, with a dissolution of House of Representatives.

My past entry: Consumption tax election by Abe is absurd

As expected, LDP won the election, and the tax rate was fixed for a while. However, the second postpone seemed unrealistic, because the financial situation in Japan is in peril. Abe administration had to carry out the hike with minimizing the damage to citizens’ life.

Consumption tax has regressivity. Thus, poor people have to pay the tax for each purchase at the same rate as rich people. It makes poor people’s life difficult, because they cannot compress the expenditure anymore. To resolve this problem, most countries adopt some exemptions.

Firstly, the government planned to refund money to people with low-income. If it is realized, subjects would not need an extra cost after hiking tax, theoretically. But, the procedure of calculating the amount of refund was too complex to be carried out. Also, Komeito Party strongly opposed to this idea. Finally, the LDP abandoned this plan.

Next, it was discussed that some categories of items should be exempted from a tax hike. Many developed countries adopt dual tax rate policy. In the UK, foods, as well as clothes for children, are exempted from VAT, while luxury goods are subjected to VAT by 20%. In France, the newspaper is also exempted.

LDP and the government were afraid of reduced revenue from raised consumption tax. If fiscal situation is not improved, hiking will be meaningless. The administration hesitated to adopt many things to the exemption. Firstly, only fresh foods were considered to be subjected.

However, Komeito Party strongly resisted to this idea. Indeed, poor people tend to consume processed food, since fresh food tend to be expensive in Japan. It insisted that processed food should also be included in the exemption. At last, the LDP accepted the request of Komeito Party.

It is unclear if this decision is the best. First of all, exempted foods will be still subjected to current tax rate (8%). The effect to aid people with low income will be limited. On the other hand, the total cost of exemption will be 1 trillion JPY (8 billion USD) per year. Hiking the tax has a risk to suppress the economic activity. It is doubtful that the government can gain the adequate amount of budget to compensate expanding cost for social security.

JapanToday: Sales tax hike exemption may put fiscal reform efforts at risk

In my opinion, the combination of raising consumption tax at a rapid pace and complete support to poor people would be preferable. Anyway, a historic decision was made. We have to watch the coming situation carefully.


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