Showdown over sales tax breaks on the horizon

by Reiji Yoshida

Staff Writer

A political showdown is approaching as the two ruling parties continue talks to nail down details of tax reform by their self-imposed deadline of Jan. 24, in particular over whether daily essentials such as food should be exempt from the planned hike in the unpopular consumption tax.

New Komeito, the junior coalition partner of the Liberal Democratic Party, has insisted that lower rates should be applied to such items as meat, vegetables, rice and miso paste as well as newspapers to reduce the burden on low-income households.

The LDP, meanwhile, has agreed to eventually introduce special low rates for certain basic items but says it’s impossible to launch such a radically new system in April 2014, when the tax is due to be raised to 8 percent from the current 5 percent.

“There are problems we need to overcome, such as (the resulting decrease in projected) revenue and understanding of people in the distribution industry,” LDP tax research council chief Takeshi Noda said Monday. “We can’t say yes right away.”

Special low rates for food products would considerably reduce revenue from the sales tax and force the government to revise its middle to long-term fiscal plans for covering swelling government spending, according to Chuo University Law School professor Shigeki Morinobu, an expert on tax issues.

“Food accounts for one-third of consumption by the average household. If special rates are applied, a huge amount of tax revenues would be lost,” said Morinobu, a former Fiance Ministry official. The government “would need to review their tax reform schemes.”

He also pointed out that to introduce multiple rates for the tax, Japan, like many other developed countries with a value-added tax system, would need to introduce an “invoice system” to force businesses to track and retain all sales and procurement records of each product item.

In doing so, all businesses would need to change their computer systems and tax offices would have to prepare for a massive increase in paperwork.

These preparations would take a long time and getting ready by April next year would be impossible, Morinobu observed.

Pundits also say political debate about the definition of “daily essentials” would spark endless discussions of what products should be exempt from the higher tax rate.

New Komeito has proposed lower rates should only be applied to a limited number of basic necessities, such as “fresh foods” like meat, vegetables and rice.

“If you say a low rate should be applied to rice, what about bread? If soy sauce is a daily essential, what about salt and (other Western) spices? Such debates will continue forever,” Morinobu said.

New Komeito has also argued that a special low rate should be applied to fish. But there are numerous kinds of fish and some are very expensive.

“You would need a national debate to make a decision on each item. There has never been anything like that,” Morinobu said.

Many tax experts agree that in general the consumption tax has to be raised significantly to cover the swelling social security costs in Japan’s rapidly aging society, because the costs of levying the tax are relatively small and the burden is spread among consumers of all generations.

They fear that if the system is made too complex, much of the tax’s advantage would be lost.

Morinobu said he believes that special low rates should be introduced to certain daily essentials if the rate should be raised higher than 10 percent, because otherwise it would be politically difficult to win the approval of voters.

Despite the importance of the issue, current political processes dealing with key tax issues are not fully open to the public.

The LDP has abolished a government tax panel and instead revived closed-door talks within the party’s powerful tax panel, and negotiations are ongoing with New Komeito’s counterpart, but neither are open to reporters.

The LDP’s tax panel doesn’t include any Cabinet members. Thus, the finance minister is not able to explain the tax panel’s discussions and decisions, while still bearing responsibility for the outcome, Morinobu pointed out.

“The LDP panel should include some Cabinet members, such as vice finance ministers,” so the Cabinet will be held responsible for the decisions by the party’s tax panel, he argued.