Japan: New Japanese invoicing requirements for consumption tax (JCT)

In brief

The Japanese value added tax is referred to as JCT. As all taxes around the world have connections with the history of the tax mechanism of each country, the explanation below also covers the history of the discussions regarding introducing value added tax in Japan.

Overview of the history of introducing value added tax in Japan 

As a historical background to understand the JCT mechanism, it may be worthwhile mentioning the history of value added tax in Japan. In the early 70s, to tackle the budget deficit at that time, the ruling party (the Liberal and Democratic Party (LDP)) and the government were contemplating introducing value added tax in Japan. 

However, the LDP and the government twice failed to introduce valued added taxes in the late 70s (1979) and late 80s (1987), respectively. In these proposals, it appears that the introduction of the EU-type value added tax was contemplated, including the invoice method. In the 70s and 80s, tax revenue was mainly corrected by means of income taxes, such as individual income tax and corporate income tax. The marginal progressive rate of individual income tax was 88% (including local tax), and the standard effective tax rate of corporate income tax was approximately 55%. In other words, the majority of the tax revenue was collected from wealthy people and large corporations at that time. However, tax revenue that mainly relies on income taxes is destined to fluctuate with economic conditions, and any tax revenue mainly sourced by income taxes is not necessarily stable. Indeed, in the 70s, Japan was suffering from a shortage of tax revenue due to the economic downturn, including the oil crisis, and an increase in expenditures, especially medical expenditures corresponding to the aging population. Under the circumstances, the LDP and the government were contemplating introducing value added tax as a stable source of tax revenue. However, in 1979 and 1987, the introduction of value added tax was not supported in the election and failed. There was strong opposition from the majority of middle-class voters potentially targeted by the value added tax. As a result of the defeats in election, the ruling party withdrew the proposal.

History of the JCT

In 1989, after around 20 years of discussions regarding the introduction of value added tax, the JCT was introduced. It replaced the commodity tax, which was only imposed on listed luxury goods whose purchasers were mainly wealthy people. 

Traditionally, no invoice method has been applied for the input JCT credit for the purpose of simplifying the JCT-related procedures. This was practically possible as the JCT rate was a single rate until 30 September 2019.

In addition, under the JCT system, in relation to small/medium-sized enterprises, exemption measures are also provided. It can be said that having no invoice system is a part of such measures. Namely, to protect small/medium-sized enterprises as parties in transactions with JCT taxpayers (i.e., so as not to be excluded from transactions with the JCT taxpayer solely because they are not JCT taxpayers), no invoice system has been introduced under which only JCT taxpayers can claim the input credit. Instead, as all business enterprises retain and maintain the invoices and other records, and the books of account recognizing commercial transactions, a so-called books and record method has been adopted in recognizing the JCT-taxable transactions. Namely, the input JCT creditability is determined based on the nature of the transaction supported by the books and record requirements (i.e., it is required to maintain accurate records in the books of account, retaining traceable records of the transactions). 

The items to be stated in the books of account and the records (invoices, etc.) are summarized in Table 1 below. Due to the introduction of multiple JCT rates, this has been changed slightly, as shown in the columns on the right. 

Table 1 - Requirements for the books and records  

These are mostly overlapping and there have been some critical comments from practitioners that both the books and records requirements are redundant and too burdensome.