Overview of consumption tax
Who needs to file a consumption tax return?
Corporations have to file a consumption tax return within two months after the end of each tax year (fiscal year). But some corporations such as newly established corporations do not need to file it under certain conditions. Thus it is important to know whether you need to file it or not before understanding the details of consumption tax rules. See taxable person for details.
How is consumption tax calculated?
The consumption tax formula is: (1)Consumption tax on taxable sales -(2)Consumption tax on taxable purchases
This is a very rough formula and does not explain the details. It only shows you need to pay consumption tax when (1) is greater than (2), and get a consumption tax refund when (1) is less than (2).
What is the ‘simplified tax system’?
Actually, there are two types of consumption tax systems. And the above formula is used when your corporation choose the ‘general tax system’. The ‘simplified tax system’ is the other option which is usually for small and medium-sized corporations. As the name implies, the simplified tax system is less complicated than the general tax system. The system only needs the information on taxable sales, and taxable purchases are calculated based on the taxable sales, that is, the actual amount of the taxable purchases is not used in this system. If you want to use this system, you need to submit the ‘Report on the selection of the simplified tax system for consumption tax’ to the tax office in advance.
Record every day transactions correctly
All transactions must have consumption tax codes when you record them. Your accounting software may have a preset of the codes. Make sure you have at least the below codes that we basically use for Japan consumption tax return.
General tax system: 8% tax on sales, Tax exempt sales, Non-taxable sales, Tax not applicable on sales, 8% tax on expense (broken down into expense for taxable sales, expense for non-taxable sales, and expense for taxable and non-taxable sales), tax on import, Tax not applicable on expense, etc
Simplified tax system: 8% tax on sales (broken down into type 1, 2, 3, 4, 5, and 6), Tax exempt sales, Non-taxable sales, Tax not applicable on sales, etc
Note: The current consumption tax rate is 8% but will be raised to 10% from 1st October 2019.