What is invoicing system in Japan?
In order to deduct the consumption tax you paid on deductible (taxable) purchases from the consumption tax you charged your customers, you require the ‘qualified invoices’ issued by ‘qualified taxable persons (qualified businesses)’. And you will need to submit a form to a tax office to become a qualified business. Also, a qualified business must be a taxable person. This new rule will start in October 2023.
Some non-taxable persons should become taxable persons
If you are a non-taxable person (What is taxable person? See this page), you don’t need to file a consumption tax return and the consumption tax payment. But you can still charge your customers consumption tax. Therefore, for the non-taxable persons, the consumption tax is simply (part of) the revenue. However, in 2023, above new tax rule will be introduced, and you may have to become a taxable person. Why? Taxable persons want to deduct consumption tax from the consumption tax they charge their customers. So they would purchase products or services from taxable persons rather than non-taxable persons.
What should non-taxable persons do?
If you (non-taxable person) have many business-to-business (B2B) transactions, probably you should become a taxable person in 2023 so that you can issue a qualified invoice and taxable persons who purchase your products or services are able to deduct the consumption tax. But if you are sure that the businesses that purchase your products or services are non-taxable persons, it may not be necessary. On the other hand, if you have many business-to-consumer (B2C) transactions (e.g. retail), probably you don’t necessarily have to become a taxable person because most consumers do not seem to be taxable persons. But, you never know that. If you think many of your consumers are actually taxable persons, maybe you should become a taxable person as well. So it really depends.
If you want to check your situation (roughly), you can download our spreadsheet. It is free.
Deductible invoice will become non-deductible gradually
An invoice issued by a non-taxable person cannot be used for deducting the consumption tax gradually. Only eighty percent of the invoice amount can be deductible between 1st October 2023 and 30th September 2026, and fifty percent can be deductible between 1st October 2026 and 30th September 2029. And nothing is deductible after that.