Qualified invoice System on Japanese consumption tax for small-sized Businesses

The qualified invoice system on the Japanese consumption tax will start on October 1, 2023.

How should we respond?

Businesses are obligated to pay taxes.

Basically, all businesses in Japan (sole proprietors and companies) must file consumption tax returns.

However, until now, businesses with sales of 10 million yen or less were exempt from filing consumption tax returns. Such businesses are called tax-exempt businesses. Those other than tax-exempt businesses are called taxable businesses.

With the introduction of the qualified invoice system, it is expected that many businesses with sales of 10 million yen or less will opt to become taxable businesses and start to file consumption tax returns. 

Calculation of consumption tax

Consumption tax liability is calculated by deducting the consumption tax paid on the purchase of goods from the total consumption tax collected from the sales transactions in the same business year.

Example 

Sales (including tax) 9,900,000 

Purchases of goods and services (including tax) 5,500,000 

(1) Consumption tax collected from customers: 900,000 (=9,900,000*10%)

(2) Consumption tax paid by the business to the suppliers: 500,000

(3) Amount of consumption tax to be paid: 400,000 yen.

You must file a consumption tax return and pay the tax of 400,000 yen.

However, if you are a tax-exempt business, you are exempted from paying this 400,000 yen tax.

What happens with the qualified invoice system?

  • The business registered as a qualified invoice issuer will obtain a registration number. 
  • Registered businesses are called qualified invoicing businesses.
  • Registration or non-registration is optional. Only taxable enterprises can be qualified invoice issuers. 
  • In order to apply for the tax credit for consumption tax on purchases, it is necessary to receive a qualified invoice from a qualified invoicing business. (Purchases from parties other than qualified invoice issuers, such as tax-exempt businesses, are not eligible for a tax credit for consumption tax on purchases.

If you purchase goods and services from a business that is not registered, you will be disadvantaged because you will not be able to claim tax credits.

You should register for the qualified invoice system to avoid disadvantages for your clients. Otherwise, they may stop doing business with you.

What happens to tax-exempt businesses?

Once registered and become a qualified invoicing business, you cannot become a tax-exempt business even if your sales are less than 10 million yen. You must file a consumption tax return and pay consumption tax.

If you want to remain a tax-exempt business operator, you should not become an invoice-issuing business operator.

You need to decide whether to register and become an invoice-issuing business or remain a tax-exempt business.

Transitional measures for purchases from tax-exempt businesses

Even if you purchase goods and services from tax-exempt businesses, the following tax credits are available for 6 years after the start of the system.

October 1, 2023 – September 30, 2026: 80% credit available

October 1, 2026 – September 30, 2029: 50% credit available

From October 1, 2029: No deduction allowed

 

for reference

Foreign business exporting to Japan, Japanese consumption tax return.