What is taxed
Legally, a taxable transaction must be all of the following:
- The transfer or lending of property, provision of services, or import of foreign cargo
- In Japan
- By, and as, a business (whether an individual or corporation)
- For consideration (whether or not it is in cash)
Under this standard, a number of transactions are not subject to consumption tax, including salaries and bonuses, gifts, insurance, dividends and damage compensation.
There are also a number of transactions specifically exempt from consumption tax, including:
- Most real estate transactions
- Most tansactions solely involving securities or cash equivalents
- Interest payments
- Foreign exchange transactions
- Residential leases (provided that the lease is more than one month long and limited to residential purposes)
- School tuition and fees
- Various government services
For a fairly exhaustive list in Japanese, see NTA Tax Answer 6201.
How the tax is calculated
The consumption tax rate is 5%, which is subdivided into a 4% national tax and 1% local tax. Under legislation passed in June 2012, the total rate is set to increase to 8% in April 2014 and 10% in October 2015.
The current official calculation method is 4% of taxable sales, minus 4/105 (3.81%) of taxable expenditures, times 125%. There are two exceptions for smaller businesses.
- If a business had taxable sales of less than 50 million yen two fiscal years ago, it may file for a simpler calculation method where its taxable expenditures are assumed to be a fixed percentage of its taxable sales. The fixed percentage is 90% for wholesalers, 80% for retailers, 70% for manufacturers, 50% for service business or 60% for other businesses. (See NTA Tax Answer 6505)
- If a business had taxable sales of less than 10 million yen two fiscal years ago, AND (in the case of a company or other business entity) had paid-in capital of less than 10 million yen at the start of the current fiscal year, it is exempt from paying consumption tax. (See NTA Tax Answer 6501)
How the tax is paid
Each business is supposed to file and pay its consumption tax bill on either a quarterly or monthly basis, generally within two months of the end of each period. (See NTA Tax Answer 6601)