1.) Two different Consumption tax filer status (Exempt vs. Non-Exempt)
For individuals or SMEs (Small & Medium-sized Enterprises whose definition is that their capital is less than 10M yen), there are 2 options to choose from. One is Exempt status (of consumption tax) and the other is Non-Exempt status. The default status is Exempt for the first 2 years.
In most cases, the Exempt status is better because, simply, your revenue is usually bigger than your expenses and your consumption tax obligation is 10% of the sales minus the 10% of your expenses, which usually turns out as payable. But there are situations where you will get a refund by choosing the Non-Exempt status.
The typical situations are:
Your business is mainly to export of goods to countries overseas OR provide services to someone overseas,
You buy an expensive property or build a new building/apartment/hotels.
You can choose your Consumption Tax filer status under certain conditions but there is a deadline.
2.) How to determine the consumption tax status.
Sole proprietors and SMEs, they are Exempt status for their first 2 years by default. From the 3rd year, it depends on the amount of their turnover in its Base Year (2 years ago). If its turnover was more than 10MM yen, then she will be a taxpayer automatically. There is no choice. If its turnover in the Base Year was less than 10MM yen, she will have a choice. It will be her choice to be Exempt or Non-Exempt status of Consumption Tax.
3.) How to apply your choice (when it’s available) and when
The deadline to choose the consumption tax filer status for a fiscal year is the end of its previous fiscal year. If you want to be a consumption tax filer for 2021, for example, you have to submit an application form to the tax office by Dec. 31st, 2020 as follows:
Form to choose as Consumption Tax Filer 課税事業者選択届出書
But there is an exception to this rule. For the first fiscal year, the deadline is the end of the first fiscal year. The deadline for the second year is also the end of your first fiscal year. For example, if you incorporated your company in the middle of Y2021. Your choice of consumption tax filer status has to be made (and submit a form) to the tax office by the end of 2021. Please be careful about the availability of the e-tax system. They may suspend the operation (as is the case usually) from Dec 29 to Jan 3rd.
4.) Restriction to become back again to Exempt status after getting a refund
You will not be allowed to become Exempt status for the next 2 years if you became a Consumption tax filer by your choice (by submitting the “Form to choose as Consumption Tax Filer”). You will also not be allowed to become Exempt status if you purchase a fixed asset (e.g. car, renovation of a room/building) for the next 3 years while you are in the first 2 years since you became a Consumption Tax Filer by choice. This is called High Price Asset (高額特定資産)
Appendix. Forms to be used
There is a similar form (with a confusing name) called 課税事業者届出書 (Notice that you became a Consumption Tax Filer). Be careful, this form will not have any impact to become a consumption tax filer.