Tax hike will pose serious costs for companies

Kyodo

In response to the coming increase in the consumption tax, companies have set about revising their computer systems and business strategies in preparation for a smooth transition. While many businesses are expected to require only simple updates to their computer programs, others with complex systems face considerable challenges before the rate starts going up in 2014.

And companies dealing with high-price items such as homes and vehicles are already lobbying the government to take steps to minimize the tax hike’s negative impact on their industries. Among those expecting a rough road is East Japan Railway Co., operator of vast train network encompassing the Kanto and Tohoku regions.

In addition to revising its transportation-related systems, JR East will also have to wrestle with how the change will impact the Suica electronic fare card. Besides covering train and bus fares, the card serves as electronic money. It can be used at a wide range of places outside the JR system, such as convenience stores, restaurants and vending machines.

Introduced in November 2001, about 40 million Suica cards were in circulation as of the end of July.

Updating the card system to reflect the higher consumption tax will be complicated and is expected to take more than a year. JR East is under pressure to ensure a flawless transition, given the chaos in 2007 when Suica programming problems resulted in extensive paralysis of automated ticket gates at its stations as well as other companies’ train and subway stations connected to its network.

“Any error in payment charges must absolutely be avoided,” a JR East public relations official said. The cost of revising the systems will also be substantial. In 1997, when the consumption tax was raised to 5 percent from 3 percent, JR East spent about ¥3.3 billion on necessary system changes, including reprogramming ticket machines and altering train fare signs at its stations.

“This time, as the tax hike will come in two stages, expenses will possibly pile up,” the official said.

The rate will rise to 8 percent in April 2014 and then to 10 percent in October 2015, mainly to help pay for swelling social security costs. The consumption tax, introduced in 1989 at an initial rate of 3 percent, was raised to 5 percent in April 1997.

Meanwhile, pressure is mounting on the government to implement measures to ease the impact on industries expected to be particularly affected by the tax hike, including erratic demand. The housing industry, for example, is likely to experience a sharp increase in sales before the tax hike and a drop after.

When the tax was raised in 1997, buyers drove up demand ahead of the hike. Housing starts in fiscal 1996 came to 1.63 million, up 150,000 from the year before. That was followed by substantial declines over the two following years, with sales falling by about 290,000 units in fiscal 1997 and 160,000 in fiscal 1998, according to the land ministry. “Buying a home is the biggest purchase in a lifetime and so the additional tax burden is significant,” a man in his 30s said recently as he visited a condominium showroom in a popular Tokyo residential area. The housing industry has called on the government to consider steps to avoid a repeat.

The government is now examining measures to reduce the burden on home buyers, such as extending and expanding the current tax cut for consumers with housing loans.

“We aim to come to a conclusion by the end of the year,” a senior ministry official said. Likewise, the auto industry is demanding that the automobile acquisition and weight taxes be eliminated prior to the consumption tax hike.

Arguing that the levies — particularly the acquisition tax — constitute double taxation, the Japan Automobile Manufacturers Association has stepped up its lobbying activities to eliminate them.