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The invoice system, under which the exact amount of consumption tax is conveyed to customers, will start from October. Many small businesses are anxious about this system, so the government needs to provide thorough explanations on the introduction of the system.
There are two consumption tax rates: a standard rate of 10% and a reduced rate of 8% for daily necessities such as food and beverages. The invoice, in what is also known as the qualified invoice-based method, clearly states the consumption tax rate and amount for each type of item.
Consumption tax on goods and services paid by consumers goes to the central government via business operators. When businesses pay the consumption tax, they can receive what is known as a purchase tax credit through which they can deduct the amount of tax paid on purchases in business-to-business transactions from the amount of tax due.
This is a mechanism to avoid multiple taxation at the production and distribution stages.
Currently, even when a business conducts transactions with small businesses that do not have to pay consumption tax, the consumption tax is deemed to be included in the purchase price and the equivalent amount can be deducted. From October, however, in principle the precondition for the tax credit is the issuance of qualified invoices by suppliers.
The invoice system is indispensable to accurately state the amount of tax in business-to-business transactions and increase the transparency and fairness of tax payments. It will avoid the so-called tax profit in which a portion of the tax that would otherwise go to the national treasury remains in the hands of a business.
Currently, businesses with annual sales of ¥10 million or less are exempt from paying consumption tax. However, they cannot issue qualified invoices while remaining tax-exempt businesses.
As a result, there is a risk that tax-exempt businesses may have transactions terminated or receive requests for discounts equivalent to the amount of consumption tax. In addition, in order to issue a qualified invoice, a business must register with the tax office as a taxable business, thus becoming obligated to pay taxes.
Registration is on a voluntary basis, but as of the end of August, only a little more than 60% of the about 1.6 million tax-exempt companies considered to have a need to register have applied.
Government support for small businesses is essential for a smooth transition. Already, various support measures are being applied.
When purchasing from tax-exempt businesses that cannot issue qualified invoices, 80% of the estimated tax amount will be deducted for the time being. Even after a tax-exempt business becomes a taxable business, the amount of tax paid will be limited to 20% of the amount of consumption tax received for the first three years of the invoice system.
It is necessary to make such measures widely known to the public and allay the concerns of businesses. It is also important for the government to strengthen its monitoring of tax-exempt businesses, many of which are small businesses and freelancers, to ensure that they are not unfairly treated by business partners, who are in dominant positions.
