Invoice System Compliance for Businesses with Sales of 10 Million Yen or Less

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

How should we respond?

Businesses are obligated to pay taxes.

All businesses in Japan (sole proprietors and companies) must file consumption tax returns and pay consumption tax.

However, businesses with 10 million yen or less sales have never filed a consumption tax return. This is because 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 invoice system, it is expected that businesses with sales of 10 million yen or less will be required to file consumption tax returns. 

Calculation of consumption tax

The consumption tax to be paid by a business to the government is calculated as follows

(1) Consumption tax deposited by customers when the business makes a sale

(2) Consumption tax paid by the business to the seller when the business purchases goods or services 

(3) (1) – (2) is the amount of consumption tax to be paid.

Subtracting as in (3) is called a tax credit.

Example 

Sales (including tax) 9,900,000 

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

(1) Consumption tax deposited by customers : 900,000 (=9,900,000*10%)

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

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

You must file a consumption tax return and pay 400,000 yen in taxes.

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

 

What happens with the invoice system?

  • The business registered with the system will obtain a registration number and issue an invoice. 
  • Registered businesses are called qualified invoicing businesses.
  • Registration or non-registration is optional. Only taxable enterprises can register.
  • To apply for tax credits, it is necessary to receive an invoice from a qualified invoicing business.
  • Registration can be revoked under specific procedures.

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.

Example: If you are a non-registered business, what would be the consumption tax calculation for your client Company A

Sales (including tax) 9,900,000 Purchases of goods and services (including tax) 5,500,000 

(1) Consumption tax Client A keeps due to sales: 900,000 (=9,900,000*10%)

(2) Consumption tax paid by Client A on the purchase from you: 500,000 

(3) Consumption tax to be paid by client A to the government: 900,000 yen (=900,000-0)

Your client is not allowed to apply a tax credit of 500,000 yen, which means your client is disadvantaged. 

You should register for the 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