There must be many people including business owners and independent freelancers in Japan who are surprised by how much consumption tax they have to pay at the end of a fiscal year when they file their tax returns. I was surprised by how expensive it can be.
Two options how to calculate the Consumption Tax Burden
Here’s the explanation about consumption tax filer options.
- A company whose sales in Base Year (2 years ago) was less than 10MM yen can elect to be a consumption tax filer. If it is the first fiscal year or the second, only a company with its capital less than 10 MM JPY has the choices. A company with more than 10MM yen in capital, it is a consumption tax filer by default.
- If a company elects to be a consumption tax filer they must stay as a consumption tax filer for 2 years, or 3 years for newly set up company if the first business year has less than a one-year period.
- If a company elects to be a consumption tax filer and has at least one purchase over 1 million yen, they must stay as a ctax filer for 3 years (and must stay as a standard method filer).
The 3 years starts from the year of the purchase.
E.g. 2021 – elect to be ctax filer.
- – No large purchase.
2022 – 1 million yen purchase = ctax must be filed until end of 2024.
Standard method or Simplified method
A simplified method can be elected if your sales is less than 50MM yen in the Base Year (2 years ago). For hotels, the simplified category is #6 so you would pay ctax on 60% of the sales, so if you think taxable expenses will be more than 40% of the sales the standard method should be better for you.
So, the company will need to elect either standard, simplified or neither.
In the Standard method, they will pay the difference between taxable sales less taxable expenses at 10% tax rate.
If the amount of consumption taxes on purchases is more than the amount of consumption tax on taxable sales, the difference can be refunded.
In the Simplified method, only sales are considered, and a refund is not possible. The company will pay tax on a portion of sales.
The portion is determined by industry as in this table https://www.nta.go.jp/english/taxes/consumption_tax/pdf/2019/simplified_00.pdf (page 17)
(but the lines are not actually so clear cut and a company can fall in multiple categories and a different rate can be used).
The tax estimate for the 2 scenarios could be as follow:
Sales (domestic) 500MM -> Consumption tax received will be 50MM JPY (10%) = A
Domestic expenses (without salary) 30MM -> Consumption tax paid will be 3MM JPY = B
Consumption tax payable will be 47MM JPY (A-B)
Simplified Method (Cat.5 – Service industry):
Sales (domestic) 500 MM -> Consumption tax received will be 50MM JPY -C
Deemed expense 250MM (which is 50% of sales) -> Consumption tax to be deducted will be 25MM -D
Consumption tax payable will be 25MM JPY (C-D)
I hope that is clearly explained. If you have any more questions I will do my best to answer.