Launch lower rate smoothly to prepare for sales tax hike
All possible measures should be taken to prepare for future tax hikes by ensuring that the new system is put into practice smoothly.
The ruling Liberal Democratic Party and its junior coalition partner Komeito have reached a broad agreement on formulating a reduced tax rate system. The lower tax rate is to be put into effect at the same time as the scheduled hike in the consumption tax from the current 8 percent to 10 percent in April 2017.
Both fresh and processed food and drinks, excluding alcohol and eating out, are eligible for tax relief by keeping the rate unchanged at 8 percent. The reduced tax rate plan will lower the government’s annual tax revenue by an estimated ¥1 trillion. The lower rate measure is expected to alleviate the pain felt by the public, especially low-income earners, due to the higher tax rate, thereby helping household budgets.
The ruling coalition parties should be praised for clinching the tax relief deal by putting their differences behind them.
Bridging the gap
The additional revenue resulting from the planned consumption tax markup is to be used solely to cover social security costs. Budgetary appropriations for social security are bound to continue to grow rapidly with the graying of the country and the low birthrate.
If the government’s stringent fiscal conditions is taken into account, we cannot help but feel that further consumption tax hikes are likely in the future. It is significant that the introduction of the reduced tax rate system agreed on this time means that daily necessities will be exempt from the hike, so it will become simpler to make preparations for possible additional tax increases in the future.
Talks between the LDP and Komeito experienced rough going because of the difficulty in bridging the gap between the two parties on what items should be eligible for the lower tax rate.
Although earlier calling for limiting the scope of the lower tax rate to fresh food, the LDP made a concession by accepting Komeito’s demand that processed foodstuffs should be made eligible for the reduced tax rate. The LDP even went so far as to propose that the reduced tax rate cover eating out, a suggestion that led to confusion.
The two parties eventually agreed to exclude dining out from the list of the eligible items, because of objections that it would be unduly generous to people in high-income brackets as they have many opportunities to enjoy meals at luxury restaurants.
The concession made by the LDP in the final phase of the talks is due to the strong determination on the part of Prime Minister Shinzo Abe and his close aides who placed priority on cooperation with Komeito in the electoral campaign for the House of Councillors election scheduled for next summer.
Processed food includes bread, noodles and others that are indispensable in people’s daily diet. We welcome the two parties’ broad agreement that makes the foodstuffs people purchase every day eligible for the lower tax rate.
The ruling coalition parties will now focus their talks on whether to apply the lower rate to items other than food.
Most countries with the reduced tax rate arrangements have made newspapers and other publications eligible for the tax relief along with food.
They have contributed to the development of democracy and the promotion of reading culture. They should not be simply considered consumption commodities, but public goods that enrich the lives of the people.
In light of their roles in society, newspapers and other publications should be covered by the reduced tax rate in Japan.
The ruling coalition parties also decided to make it mandatory for business operators to adopt an invoice system in which the amounts of tax and tax rates would be included in their bill, effective from fiscal 2021.
Invoices good idea
With multiple tax rates, there is a possibility of operators engaging in a rash of fraudulent practices, such as by disguising sales actually made under the standard tax rate as having been made under the reduced tax rate, thereby allowing them to retain part of the tax as profit.
In preventing such fraud, the adoption of invoices is deemed reasonable.
Now that the ruling parties have reached an agreement, the government needs to steadily move ahead with preparatory work to introduce the reduced tax rate.
To prevent confusion among consumers and business operators at stores over the multiple tax rates, the government should make a clear distinction between items subject to the reduced tax rate and those that are not, come up with ways to deal with problematic cases and spare no effort to disseminate the multiple tax rates as widely as possible.
The reduced tax rate is not applied to dining in restaurants but a question arises as to how to distinguish between eating inside a fast-food restaurant and taking out food. It is important to establish precise guidelines.
It is also vital for the government to help small stores deal with the multiple tax rates by, for instance, financially assisting them in having their cash registers modified and by holding instruction courses for them to learn the new accounting system.
A major worry is that there are no prospects at present in securing the necessary financial sources to make up for the revenue shortfall when the reduced tax rate is introduced.
Currently, the government has decided only on a policy of allocating ¥400 billion that had originally been earmarked to assist low-income people when the tax is raised.
The LDP has been saying that the necessary financial sources should be managed within the framework of social security expenses. But it is undesirable to put an excessive burden on health care and nursing care programs. The party should deepen its discussions on whether the government can hold down expenditures in areas other than social security spending or make use of other tax revenues.
LDP Secretary General Sadakazu Tanigaki emphasized: “We will uphold the government’s plan to restore its fiscal health. We will take responsibility for securing stable and permanent fiscal resources.” We hope the LDP will continue studying ideas such as raising the tobacco tax as advocated by Komeito.
Reduce ‘tax profits’
Also remaining to be worked out is the issue of what to do with “tax profits” as some business operators pocket part of the consumption tax, rather than turn it over to the government.
It has been decided that even after the reduced tax rate is introduced, the current consumption tax exemption system for small-business operators and the simplified tax system that makes tax calculations easier are to be kept in place.
At present, tax profits are estimated to amount to ¥600 billion a year. It will be unavoidable that tax gains will grow following the tax hike.
As the government will make consumers pay a higher tax, it is logical to reduce such tax profits. Should the government allow such profits to expand instead, the public would not understand.
The ruling parties must examine this issue in a much more sincere manner.
(From The Yomiuri Shimbun, Dec. 13, 2015)