DPJ eyes ending auto levy to offset sales tax boost

Kyodo

The ruling Democratic Party of Japan’s tax chief has suggested a levy on vehicle purchases could be eliminated to help ease the negative impact of the planned consumption tax hike on the economy.

In response to calls from carmakers, the Ministry of Economy, Trade and Industry has proposed abolishing the automobile acquisition and weight taxes, a move that could boost vehicle sales and underpin an industry plagued with waning domestic demand and the strong’s yen effect on exports.

“I think we may draw a clear line when the consumption tax increases to 8 percent (in April 2014),” Hirohisa Fujii, a former finance minister who heads the DPJ’s tax research panel, said in an interview, referring to the possible elimination of the tax.

The government has enacted legislation to hike the consumption tax from 5 to 8 percent at the beginning of fiscal 2014, and then to 10 percent in October 2015 as part of fiscal consolidation efforts.

But many economists fear the higher levy will hurt consumer and business sentiment. Some companies, particularly automakers and home builders, have asked the government to introduce measures to soften any potentially negative effects on private consumption and capital spending by businesses.

The Land, Infrastructure, Transport and Tourism Ministry on Tuesday proposed expanding tax breaks for those who borrow from financial institutions to purchase homes, starting in 2014.

In December, the government and the DPJ will draft tax reforms for fiscal 2013 amid calls that the two auto-related levies be scrapped from the year starting in April. Fujii’s comments came in response to such requests, alluding to the need to introduce wider reforms together with the consumption tax hike.

As the government is also seeking to raise the maximum rate for income tax, Fujii said he will support the DPJ’s initial proposal to raise the rate to 45 from 40 percent for those who earn more than ¥50 million in annual taxable income.

The proposal comes as the government and DPJ are studying measures to ease the impact of the consumption tax increase on lower-income households while increasing the burden on the wealthy.