Fraud by shoppers reselling tax-free goods prompts reform
Japan is planning to revise its Consumption Tax exemption system for foreign visitors to curb the resale of tax-free goods within the country. The current Consumption Tax rate is 10%, with an 8% lower rate for essentials.
The changes are set to take effect in April 2025.
The government, along with the ruling Liberal Democratic Party, intends to shift from the current system, where taxes are deducted at the time of purchase, to one where taxes are refunded only after confirming that the visitors have taken their purchases out of Japan.
Japan’s tax exemption system, which allows visitors to buy goods without paying consumption tax by presenting identification like a passport, is distinctive. However, an investigation of 57 visitors who each bought tax-free goods worth over ¥100 million in 2022 revealed that only one actually took the items out of the country. The remaining 56, who were obligated to pay the tax, left Japan without doing so, resulting in ¥1.85 billion in unpaid taxes.
Consumption Tax refunds
Tax refund in Japan applies to all items, from general items such as home appliances, accessories, and shoes, to consumable items such as alcohol, food, cosmetics, cigarettes, and medicines.
Purchases that total 5,000 yen or more qualify for a tax refund. The relief only applies to foreign visitors in Japan temporarily.
What items are excluded
- Delivery fees and service charges not eligible for tax refund
- Alcohol
- Frozen items are not eligible for any tax refund
Consumption Tax versus Value Added Tax
Japan’s Consumption Tax and Value Added Tax (VAT) are similar in that both are forms of indirect taxation applied to goods and services. However, there are some key differences between the two:
Application:
- Consumption Tax: In Japan, the consumption tax is a flat rate applied to most goods and services at the point of sale. The tax is typically included in the price and is paid by the consumer.
- VAT: VAT is also applied at each stage of production and distribution, but the tax paid on inputs can usually be deducted by businesses, so only the value added at each stage is taxed. The end consumer ultimately bears the full burden of VAT.
Tax Rates:
- Consumption Tax: Japan’s consumption tax rate is currently set at 10%, with a reduced rate of 8% for certain essentials like food and beverages (excluding alcohol and dining out).
- VAT: VAT rates vary by country, with rates typically ranging from 5% to 27% depending on the country and the goods or services in question. Many countries also have different rates for various categories of goods.
Exemptions and Reduced Rates:
- Consumption Tax: Japan offers a reduced rate for certain essentials and has specific exemptions, such as for education and medical services.
- VAT: Many countries with VAT also have reduced rates or exemptions for essentials like food, books, and medicine, but the specifics vary widely by country.
