How to calculate Consumption Tax

When you run a business in Japan, you may need to pay consumption tax to the tax office. But some of you may not know how to calculate the amount.

In this Article, we explain how to calculate the amount of consumption tax which sole proprietors and companies in Japan need to pay.

Regular Taxation and Simplified Taxation 

There are two types for calculation of consumption tax in Japan. One is Regular Taxation and another one is Simplified Taxation.  

Under Regular Taxation, you need to calculate the amount of consumption tax on every transaction in which your company is involved throughout a year.

On the other hand, under Simplified Taxation, you can calculate the amount easily without checking each transaction.

Therefore, Simplified Taxation can save much time and efforts for the tax calculation. 

However, there are some cases where you may need to pay more tax under Simplified Taxation than the tax you need to pay under Regular Taxation.

Requirement for Simplified Taxation

If annual taxable sales of a sole proprietor or a company exceeds 50 million yen, they are not entitled to use Simplified Taxation.

In addition, sole proprietors and companies need to submit notification to tax office as described below.

Calculation Under Regular Taxation 

Under Regular Taxation, the amount of consumption tax which each sole proprietor or company needs to pay to the tax office can be calculated as follows. 

The amount to Pay to Tax Office = Consumption Tax on Sales – Consumption tax on Procurement 

For example, manufacturers procure the parts and components  and for each of such procurements, they need to pay consumption tax added the price of such parts and components.

Then, by incorporating the parts and components, manufacturers make their own products. The price of products is usually higher than total price of the parts and components because the price of products includes certain amount of profit.

So, the amount of consumption tax on sales is usually higher than the amount of consumption tax on procurement.

The difference between the consumption tax on sales and consumption tax on procurement will be the amount which manufacturers need to pay to tax office. 

The way of calculation above is quite easy to understand. So, some of you may think you can handle it yourself.

However, it’s quite time-consuming work because they need to check the amount of consumption tax they paid and received for all transactions throughout a year.

This is especially true for owners of restaurant who need to handle two types of consumption tax rate 10% and 8% (please refer to our article ”Basics of Consumption Tax in Japan for Business owners”).  

 

Calculation under Simplified Taxation 

 On the other hand, under Simplified Taxation, you don’t need to check the amount you paid and received for each transaction.

Consumption tax can be calculated under Simplified Taxation as below. 

The amount your company needs to pay = consumption tax on sales – (consumption tax on sales × procurement rate designated for the industry of your business) 

Procurement Rate is designated for each industry as below. 

	Industry	Procurement Rate
1	Wholesale Business* *Wholesale Business here stands for the businesses which purchase products from others and sell them to other companies or business providers without making a change to the products.	90%
2	(1) Retail Business* *Retail Business here stands for the business which purchases products from others and sell them without making any change to the products, except for the Wholesale Business above. (2)Agriculture, Forestry or Fishery which related to food and beverage products	80%
3	(1)Agriculture, Forestry or Fishery which is NOT related to food and beverage products (2) Mining, Construction, and Manufactures (including manufacturing retailer) (3) Electric or gas industry, heat supply or water supply business	70%
4	Restaurant business, etc.	60%
5	Service business including logistic, finance and insurance services except restaurant business	50%
6	Real Estate business	40%

As you can see above, procurement rate can vary depending on which industry your business belongs to.

Under Simplified Taxation, some sole proprietors or companies may need to pay more than the amount calculated under Regular Taxation.

You should consult with tax accountant about:

(i) which category your business belongs to; and

(ii) which calculation method is beneficial for your business, Regular Taxation or Simplified Taxation.  

The Procedure to take advantage of Simplified Taxation. 

To use Simplified Taxation, you need to submit the notification of your decision to use Simplified Taxation “消費税簡易課税制度選択届出書”.

This notification needs to be submitted by one day before the commencement of the taxable period when you plan to take advantage of Simplified Taxation.  

Please check the detail of the process and form of the notification in the following page of national tax agency’s website.

(English Explanation)

https://www.nta.go.jp/english/Guidelines_pdf/19.pdf

(Japanese Explanation)

https://www.nta.go.jp/taxes/tetsuzuki/shinsei/annai/shohi/annai/1461_13.htm

Because you need to submit the notification before the commencement of taxable period, you can’t switch the calculation method during a year, even if you noticed another way of calculation method is more advantageous taking account of actual procurement rate of the year.

 

In some case, Japan’s consumption tax system requires sole proprietors and companies to pay a half of consumption tax as “Interim Payment”（中間納付） prior to the time when the tax should be paid.  

Please check our article About “Interim Payment of Japanese Consumption Tax” for more details.

Interim Payment of Japanese Consumption TaxIn some case, Japan's consumption tax system requires sole proprieto...

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