Consumption tax is paid indirectly to the government by businesses on behalf of customers.

Therefore, though the consumption tax is essentially borne by the customer, the receipt of the tax by the business at the time of purchase of goods or services creates an obligation to pay the consumption tax collected.

For taxable businesses to properly pay sales tax, they must calculate the amount due and pay it to the tax authority. So it is important to understand how to correctly calculate sales tax to ensure you follow the proper procedures.

This article explains the formulas used to calculate consumption tax for Japanese tax returns, including the regular taxation method, the simplified taxation method, and the 20% special exception.

What’s in this article?

• How is consumption tax calculated?
  
• Two main consumption tax calculation methods and the 20% special exception
  
• Understanding how to calculate consumption tax and file a tax return
  
• Frequently asked questions
  

How is consumption tax calculated?

Consumption tax is paid by businesses on behalf of customers. Taxable businesses must pay consumption tax received from customers to the appropriate tax office.

Typically, the applicable portion of purchase tax credit will be deducted in advance. Note that the consumption tax calculation method is basically “consumption tax on taxable sales” minus “consumption tax on taxable purchases, etc.” (See “Regular taxation method").

What is the tax base for consumption tax?

The key to understanding how to calculate the consumption tax is to know the consumption tax base.

The tax base for consumption tax is the amount of consideration for the transfer of taxable property in a transaction in Japan. Consumption tax on goods and services is calculated by multiplying the tax base by the tax rate, so the tax base amount is the amount used as the basis for calculating the amount of consumption tax to be paid (National Tax Agency (NTA), “Tax base”).

In simple terms, the taxable base is the “taxable sales amount excluding tax (sales of taxable transactions),” which excludes consumption tax and local consumption tax.

Note: Transfer of taxable assets, etc. The amount of consideration is the amount received in exchange for the transfer of assets, the lending of assets, or the provision of services, which can include rights or economic benefits other than money.

Two main consumption tax calculation methods and the 20% special exception

When filing a consumption tax return, you must calculate the exact amount of tax due.

According to the NTA, you should prepare well before the filing deadline because an untrue return or a late filing can result in additional taxes, delinquent taxes, and other incidental taxes.

The method chosen for calculating the consumption tax depends on the circumstances of each business; there are two main methods: the regular taxation method and the simplified taxation method. Another calculation method uses the 20% special exception established as a transitional measure for the Invoice System for businesses that voluntarily elected to become a taxable business from a tax-exempt business.

• The regular taxation method can be used by any business, regardless of industry, as a general method of calculating the tax credit for purchases. Also known as “general taxation” or “principle taxation.”

• The simplified taxation method is particularly suitable for small businesses. This method is simpler than the regular taxation method, making it easier to calculate the amount of consumption tax to be paid.

• The 20% special exception can be applied when a tax-exempt business voluntarily enrolls in the Invoice System and becomes a taxable enterprise, reducing the amount of consumption tax paid to 20% of the amount of consumption tax on sales. Note that the applicable period is the taxable period from October 1, 2023, to September 30, 2026, after the start of the Invoice System.

Each consumption tax calculation method is described below.

Regular taxation method

The amount of tax payable under the regular method of taxation is calculated by subtracting the “amount of sales tax on purchases and expenses” from the “amount of sales tax on taxable sales” of the business. This deduction is called the purchase tax credit.

Regular taxation formula

• Consumption tax payable = Consumption tax on taxable sales - Consumption tax on purchases and expenses
  

Consumption tax should be calculated separately for each tax rate of 10% and 8%. Tax-exempt transactions are excluded.

Mixing multiple tax rate items in sales and purchases can complicate calculations, especially for businesses that handle complex transactions daily. In addition, failure to receive a qualified invoice under the Invoice System can result in failure to claim the purchase tax credit, further complicating calculations when filing tax returns.

The simplified tax system, a simpler method of calculating sales tax, can be used to avoid this problem—but only if the business meets certain requirements.

Simplified taxation method

The simplified taxation method calculates the amount of tax due based solely on the “consumption tax on taxable sales” and the “deemed purchase ratio.”

The simplified taxation method is allowed only for taxable businesses with taxable sales of ¥50 million or less for the standard period.

To elect the simplified taxation method, a consumption tax simplified taxation system election form must be submitted to the appropriate tax office by the day before the first day of the taxable period. Even if taxable sales for the standard period are ¥50 million or less, the simplified taxation method cannot be applied unless the reporting procedures are completed beforehand.

Under the simplified taxation method, the amount of consumption tax payable is calculated using the deemed purchase ratio as described above. However, the rate varies depending on the business category.

The deemed purchase ratio for each business category is:

Reference materials: NTA, “Business classification for simplified taxation system”

Simplified taxation formula

• Consumption tax payable = Consumption tax on taxable sales - (Consumption tax on taxable sales x deemed purchase ratio)
  

Example: If a retailer's taxable sales are ¥30 million and the consumption tax on taxable sales is 10% and no reduced tax rate is applied

As shown in the table above, the deemed purchase ratio for retailers is 80%. Using the simplified taxation formula, the amount of consumption tax due would be:

• ¥30 million × 10% - (¥30 million × 10% × 80%) = ¥600,000
  

The simplified taxation method does not require separation of nontaxable transactions, and the calculation of consumption tax is simpler than the regular taxation method, resulting in less work for accounting operations. Unlike the regular taxation method, the invoicing system is not affected, and because invoices and other documents are not required, transactions with tax-exempt businesses can continue as before.

However, if there is a large amount of consumption tax payable on purchases and it was calculated using the deemed purchase ratio, the actual consumption tax payable might be higher than under the regular taxation method using the purchase credit. In addition, if the simplified tax method is selected, it must be used continuously for at least two years.

When choosing a sales tax calculation method, select one that is appropriate for your situation based on your business’s prospects and projected business plan.

Calculating consumption tax using the 20% special exception

The 20% special exception, which was introduced as a transitional measure for the Invoice System, applies to businesses that have changed from tax-exempt to taxable. When filing a sales tax return, the taxpayer is required to attach a statement to the return indicating the 20% special exemption has been applied.

Reference materials: NTA “20% special exception consumption tax and local consumption tax finalization guide”

Formula for calculating the 20% special exception

• Consumption tax payable = Consumption tax on taxable sales x 20%
  

Example: If taxable sales are ¥8 million and the consumption tax on taxable sales is ¥800,000 (10%) while the consumption tax on purchases excluding tax is ¥200,000 (10%) for a purchase price of ¥2 million, then

• ¥800,000 × 20% = ¥160,000
  

Under the same conditions, if we calculate the consumption tax payable using the regular taxation method, we find that the amount of tax payable is ¥600,000, which is much higher than the 20% special exception, as shown below.

• ¥800,000 - ¥200,000 = ¥600,000
  

When a tax-exempt business changes its status to taxable to become a qualified invoicing business, it must submit an application for registration as a qualified invoicing business with the appropriate box checked on the form or submit (only during the taxable period that includes October 01, 2023, to September 30, 2029) the Notification of election as a business operator subject to consumption tax.

Sole proprietors and other tax-exempt businesses need to to carefully consider whether to enroll in the Invoice System based on their business size and profit/loss because there are advantages and disadvantages to each.

Related article: “How small sole proprietors can use the Invoice System in Japan”

Understanding how to calculate consumption tax and file a tax return

Above, we have explained how consumption tax is calculated.

There are two main methods of calculating the consumption tax: the regular taxation method and the simplified taxation method; the 20% special exemption for certain periods is another option. Taxable businesses that are required to pay consumption tax are advised to understand these tax calculation methods and prepare their tax returns to pay the correct amount of tax.

If a business that had been exempt becomes a taxable business for the purpose of complying with the Invoice System, it is recommended to use the 20% special exception during the effective period.

As circumstances change and the need for digital transformation (DX) increases, one way to deal with sales tax is to use calculation software that supports multiple tax rates and to consider introducing functions to automate accounting to perform sales tax-related administrative work smoothly and efficiently.

Stripe offers Stripe Tax with automatic sales tax calculation, which can be customized. All electronic transactions automate tax processing, letting you increase operational efficiency.

Frequently asked questions

Q: How to calculate consumption tax from internal tax (price including tax)?

A: The calculation method required for a consumption tax return is based on taxable base amount (taxable sales before tax). It’s also useful to know the calculation method to check the consumption tax from the “internal tax” product price, which is the original price plus the sales tax.

For internal tax, divide the item price by (1 + tax rate). This lets us calculate the price without tax and then multiply it by the applicable tax rate to find the sales tax.

For example, the formula for a product with standard tax rate of 10% and internal tax of ¥11,000 is:

• Price including tax ¥11,000 ÷ (1 + 0.1 [Calculation of price excluding tax]) × 10% tax rate (0.1) = ¥1,000
  

If the consumption tax is 8% with the reduced tax rate, the formula is to divide the product price by 1.08:

• Price including tax ¥10,800 ÷ (1 + 0.08 [Calculation of price excluding tax]) × 8% tax rate (0.08) = ¥800
  

Q: Which transactions are subject to consumption tax?

A: There are several requirements for taxable transactions for which consumption tax must be paid in Japan, including transactions conducted in Japan and transactions conducted by a business. For more information, see the related article “What is a taxable consumption tax transaction?"

Q: When is the deadline for filing and paying consumption tax?

A: The due date for filing and payment of sales tax is the same, and for corporations it is within 2 months of the day after the end of the fiscal year (the last day of the fiscal month). For example, if the fiscal year begins April 1 of each year and ends March 31 of each year, the due date for payment is May 31 of each year.

On the other hand, for sole proprietorships, the due date is March 31 of the following year (or the following Monday if it falls on a Saturday or Sunday). Also note that the due date is different from the income tax filing due date (March 15).