Currently, the Japanese consumption tax (JCT) has two rates: 8% and 10%. This is due to the reduced tax rate system established when Japan’s National Tax Agency raised the consumption tax to 10% in October 2019, a measure they took to secure expenses related to the integrated social security and tax system reform. Under this system, the consumption tax remains 8% on some eligible items to reduce the burden on low-income customers.

This article provides an overview of the reduced tax rate and the items subject to it.

What’s in this article?

• Items eligible for the reduced 8% tax rate
  
• Food items subject to the reduced tax rate: What is taxed at 8% and 10%?
  
• Impact of reduced tax rates on tax returns
  
• How long will the reduced tax rate of 8% last?
  

Items eligible for the reduced 8% tax rate

As mentioned in the introduction, the National Tax Agency raised the consumption tax to 10% in October 2019 as part of a comprehensive reform of the social security and tax systems. The reduced tax rate refers to the fact that the 8% consumption tax rate will remain unchanged for some items.

The main items subject to the reduced tax rate are as follows

• General food and beverages: Food and beverages necessary for daily life
  
• Newspapers: Those published more than twice a week and purchased through a subscription agreement.
  

However, when we classify the above two points in more detail, it is unclear whether or not the reduced tax rate applies to some items.

It is also important to understand thoroughly what items the 8% rate and 10% rate apply to, respectively, as the reduced tax rate doesn’t apply to all items.

Commodities are not subject to the reduced tax rate

One thing to note about the reduced tax rate is that it does not apply to commodities. In addition to the aforementioned food and beverage items, our daily needs include many other goods and necessities, such as toothbrushes, detergents, and toilet paper.

Most items classified as commodities are important to daily life, and many opinions have been exchanged on this topic. Still, it is difficult to draw a line as to what constitutes a commodity for purposes of the reduced tax rate. As a result, these items are not subject to the 8% tax rate, and the current standard is 10%.

Detailed categorisation of items subject to or excluded from the reduced tax rate

Let’s take a closer look at the two items mentioned earlier, “general food and beverage” and “newspapers purchased through a subscription of two or more times a week.”

Items subject to the reduced tax rate can be categorised as follows.

Although there is some confusion as to what items are or are not subject to the reduced tax rate, it is best to understand that it applies primarily to food and beverages purchased on a daily basis, excluding alcohol and restaurant food, and to newspapers purchased on a subscription.

In addition, as can be seen from the table above, digital editions of newspapers that are not published in paper form are not subject to the reduced tax rate, and newspapers purchased at convenience stores or train stations on a case-by-case basis are not conditional to it because they are not based on a subscription agreement.

What are integrated assets?

The above table’s term “integrated asset” refers to an item that combines foods or beverages and other goods – for example, a set of coffee beans and a mug, which is sold as a gift.

According to the National Tax Agency’s “Determination of the applicable tax rate for ’integrated assets.’” if the asset meets the following two conditions, it is eligible:

• The product’s total price is ¥10,000 or less (excluding tax)
  
• The portion of the value of food and beverages accounts for more than two-thirds of the total value
  

Thus, the criterion for determining the reduced tax rate for integrated assets involves its price and the cost of its constituent items. If the value of the goods is less than ¥10,000 without tax and the proportion of the value of food and beverages is greater than two-thirds of the total price, the reduced tax rate is applicable.

Example: The reduced tax rate would apply to the following “integrated asset.”

• Set of items with a total value of ¥2,000 (eligible as it is less than or equal to ¥10,000)
  
  • Coffee beans, ¥1,500 (Price ratio: 75%, more than two-thirds of the total)
    
  • Mug, ¥500
    

Foods subject to the reduced tax rate: What is taxed at 8% and 10%?

So far, we have explained the general framework for items subject to the reduced tax rate. As described in the previous chapter, the items to which the 8% tax rate is applied include not just newspapers but also food and beverages necessary for daily life. However, among these general food and beverage items, there are many goods for which it is difficult to determine if they need to be subject to the 8% or 10% tax rate.

Food and beverage products subject to the reduced tax rate need to be food items that are purchased on a daily basis, with the exception of alcohol. The majority of these are foods purchased at supermarkets or takeaway meals, such as fast food, that are not served for on-site consumption. In other words, if one eats at home rather than eating out, the consumption tax rate for food is almost always 8%.

In addition, you can also apply the reduced tax rate when stocking up on ingredients. Foodstuffs are, therefore, subject to an 8% tax rate. On the other hand, when restaurants serve from purchased ingredients, the consumption tax rate is 10% because the tax is applied to the food service.

In most cases, the receipts suppliers issue at the time of purchase will show both 8% and 10% tax rates, since some foodstuffs and beverages purchased are subject to it and some are not. Thus, for receipts and invoices issuing requirements corresponding to multiple tax rates, the supplying business must be fully aware of which specific items are subject to the reduced tax rate.

Below are some examples of items for which it is difficult to determine whether the reduced tax rate applies.

Items subject to the reduced 8% tax rate

• Amazake (sweet drink made from fermented rice) and non-alcoholic beer (beverages with less than 1% alcohol)
  
• Seasonings such as mirin and cooking sake (items with less than 1% alcohol or which have been made non-potable and are classified as seasonings)
  
• Chocolates and other confectionery that contain alcohol (these generally contain 2% to 3% alcohol but are not classified as an alcoholic beverage under the Liquor Tax Act, so a reduced tax rate is applied)
  
• Supplements and other health foods (because they are treated as sustenance)
  
• Energy drinks (because they are classified as soft drinks)
  
• Edible ice
  

Items not subject to the reduced tax rate but subject to 10% consumption tax

The National Tax Agency applies the standard tax rate to items that do not fall under the 8% reduced tax rate, so of the food and beverage items that are purchased mainly at supermarkets, those subject to the 10% consumption tax include alcohol, pharmaceuticals, and medicated products, as well as goods for pets and domestic animals, as shown below.

• Alcoholic beverages (1% or more alcohol by volume)
  
• Mirin and non-potable cooking sake
  
• Pet food (as it is not intended for human consumption)
  
• Pharmaceuticals and medicated products (e.g., nutritional drinks, etc.; items with the words “drug” or “medicated product” on their label)
  

Definition and examples of food service that is not subject to the reduced tax rate

According to the National Tax Agency, a restaurant meal is “served by a person engaged in the restaurant business in a facility used for eating and drinking.” If the food falls under this category, it is not subject to the reduced tax rate. Still, it is a bit confusing as to what cases, other than dining inside restaurants and fast food outlets, are considered eating out.

In the previous table, we introduced the fact that restaurant meals are subject to the 10% standard tax rate. The following are the primary cases considered equivalent to eating at a restaurant.

• Food stalls (if chairs or tables are structured exclusively for eating and drinking, they are not subject to the reduced tax rate, regardless if they are full or if you get takeaway)
  
• Eating and drinking at the eat-in space in a convenience store
  
• Catering (the provision of services such as the cooking and serving of food, regardless of location)
  
• Company cafeterias and university student cafeterias
  
• Hotel room service (beverages for sale other than liquor in hotel room refrigerators are subject to the 8% tax rate)
  
• Food and drink purchased inside a cinema
  
• The consumption of fruit while fruit picking (8% if the fruit is purchased and taken home)
  

Various cases are classified as eating out, and the consumption tax rate will vary, including identical items, depending on whether the customer eats in or gets takeaway. Therefore, businesses and customers need to understand the definition of “food service” and be careful to avoid problems due to confusion over tax rates at the sites where services are provided.

Impact of reduced tax rates on tax returns

The introduction of the reduced tax rate system at the same time as the National Tax Agency raised the consumption tax to 10% has benefited customers by lowering the burden on household budgets. On the other hand, businesses were impacted by this change by making the tax return filing process more complicated due to the need to sort out and deal with sales and expenses according to multiple tax rates. Because of this, businesses need to understand the items subject to the reduced tax rate in advance.

For example, the consumption tax return required for taxable enterprises to file a final tax return must be filled out separately for each tax rate. Since this is a new form, each item needs to be filled out with due attention to its contents.

With the start of the reduced tax rate, the National Tax Rate requires more detailed paperwork to ensure that there are no excesses or deficiencies in the amount of tax paid about the supplementary schedules attached to tax returns and the procedures for applying for the purchase tax credit.

Thus, many taxable businesses are now considering introducing accounting software with support for handling the reduced tax rate and customisable, automatic consumption tax calculations that improve operational efficiency. Stripe Tax helps improve and simplify back office operations related to sales tax by automating the tax processing of all electronic transactions.

You can also take advantage of a combined payment solution, such as Stripe Payments, for various needs, which allows you to manage multiple electronic payment methods, making your business run smoother and more streamlined.

There is no need to use a specific format for receipts, although you can choose handwritten or commercially available templates. Note that when issuing handwritten receipts, it is advisable to prepare rubber or other stamps that correspond to the reduced tax rate, such as “subject to 8%,” “subject to 10%,” or “*indicates items subject to the reduced tax rate.”

How long will the reduced tax rate of 8% last?

The reduced tax rate system introduced with the October 2019 tax increase has no specific end date. Therefore, since the National Tax Agency has not yet determined whether or not all products will be completely converted to the 10% rate, the 8% reduced tax rate will remain in place until there are further changes to the JCT.