Business / Economy

Abe orders reduced rates to cushion blow from 2017 tax hike

by Reiji Yoshida

Staff Writer

Prime Minister Shinzo Abe has ordered the ruling party’s new tax panel chief to introduce special reduced tax rates for certain products such as foods and beverages in time for the planned April 2017 consumption tax hike, officials said Wednesday.

Abe’s order, given to the Liberal Democratic Party’s Yoichi Miyazawa, has ended a political row over the unpopular sales tax that had dragged on for weeks.

Senior members of the LDP’s powerful tax panel had been reluctant to introduce the special reduced rate, which would greatly increase clerical work for the retail industry, a powerful lobby group often courted by the party.

Meanwhile, junior coalition partner Komeito strongly pushed for the reduced rate because the party had promised in earlier election campaigns to introduce the system so as to ease the burden on low-income households.

Abe’s decision to side with Komeito was apparently taken with the next summer’s Upper House election in mind.

The LDP’s coalition with Komeito — which is backed by the influential lay Buddhist group Soka Gakkai — has mobilized voters that also helped elect lawmakers from Abe’s party.

“The prime minister gave Miyazawa instructions to create a concrete plan in time for the introduction of the (consumption tax hike),” Chief Cabinet Secretary Yoshihide Suga told a regular news briefing later Wednesday.

Abe’s government has already postponed the planned tax hike to 10 percent, from the current 8 percent, to April 2017. It had originally been scheduled for this month.

Observers are concerned that the government and retail industry may not be ready by April 2017 to introduce complex computer systems to deal with the multiple sales tax rates.

Asked at the same news conference Wednesday if the government would again postpone the tax hike, Suga denied such a possibility.

“Unless there is some unexpected event like the Lehman Brothers shock (of 2008), we will implement the plan as scheduled,” Suga said, referring to the bankruptcy of the U.S. securities firm that helped trigger the global financial crisis.

Abe sacked the incumbent chairman of the LDP’s tax panel, Takeshi Noda, on Tuesday and appointed Miyazawa, a former trade minister, to the position.

Noda had strongly opposed any introduction of special reduced tax rates.

Under the LDP’s seniority system, such a personnel change is very unusual, as Miyazawa has been elected to the Lower House just three times while Noda has been voted in 15 times.

Abe’s instructions mean that a plan earlier proposed by the Finance Ministry, which would have refunded some of the consumption tax revenues to consumers, will now be scrapped.

The ministry had proposed that consumers would use their My Number identification cards with every purchase of certain items and later claim refunds.

This idea proved to be hugely unpopular since consumers would need to carry the cards — which contain extremely sensitive personal information — at all times.

However, the mission assigned to Miyazawa won’t be easy and the costs will likely be huge.

According to a Finance Ministry simulation, raising the consumption tax rate by 2 points to 10 percent would add ¥5.4 trillion a year to government coffers. Much of those expected revenues would be counted on to support Japan’s graying society and its rapidly rising social security costs.

But if the existing 8 percent rate is applied to food and beverage products excluding alcoholic drinks, revenues would increase by just ¥4.1 trillion, according to the Finance Ministry.

For the countries that have introduced similar multiple sales tax rates, determining which food and drink products are eligible for the reduced tax rate has been a tricky process.

For example, a reduced tax rate might be applied to expensive wagyu beef because it is fresh and unprocessed food. But the normal tax rate would be applied to a cheap gyudon beef and rice bowl because it is a meal served at a restaurant, not “fresh food” sold at a supermarket.

For retailers, the introduction of various tax rates would be a major headache.

European countries that have introduced reduced sales tax rates have an invoice system, in which the rate or levy amount for each product is logged on a sheet of paper.

Introducing such an invoice system would greatly increase clerical work for retailers — smaller shops in particular — forcing them to greatly modify their computer systems.