Marathon tax-reform negotiations between the ruling coalition partners concluded Thursday with negotiators agreeing to reduce consumption tax on food but with details undecided, party officials said.
The Liberal Democratic Party and Komeito reached a consensus that a reduced rate will apply to food in general — including processed food, as Komeito has demanded — but they have yet to define which foods will be eligible for a lower rate, the officials said. They added, some ¥1 trillion also needs to be found to finance the reduced levy.
Meanwhile, the LDP and Komeito agreed on further cuts in corporate tax and to tax new vehicle purchases according to their fuel efficiency.
By further reducing the corporate tax rate, the government of Prime Minister Shinzo Abe aims to encourage companies to increase capital investment and wages, measures needed if the nation’s nominal gross domestic product is to reach ¥600 trillion as hoped five years from now.
The government will reduce the effective corporate tax rate to 29.97 percent in fiscal 2016 from the current 32.11 percent, which is considered high by global standards, and will further reduce it to 29.74 percent in fiscal 2018.
To make up for the decline in the corporate tax revenue in fiscal 2016, the government plans to increase taxation on large companies reporting losses.
Regarding lower tax on food, the parties’ secretaries general continued discussing details Thursday. They left the matter undecided, agreeing to omit consumption tax from the overall package so that the other changes suffer no further delay.
A consensus on a reduced rate came after the LDP offered a compromise, exempting processed food from 10 percent consumption tax when it rises to that level in fiscal 2017, up from the current 8 percent.
Earlier, the LDP had insisted that only fresh food such as meat and vegetables should be eligible for reduced tax.
However, other problems remain. The ruling parties now believe some ¥1 trillion needs to be generated to cover the loss of revenue from sales of fresh and processed foods, party sources said.
In addition, the definition of “processed food” could create more questions than answers. There also was a proposal to exclude snacks and beverages from the list of exempted items, but the parties are unlikely to set exclusions that could “cause confusion,” the sources said.
The two parties have been holding talks on how to cushion the blow to consumers when the tax rate goes up. To make up for the expected revenue loss, they have so far secured around ¥500 billion by forgoing some social security measures. The focus now is how to squeeze out the remaining ¥500 billion in financial resources.
Separately, the LDP’s offer of compromise in the negotiations was seen as a bid to maintain good ties with Komeito ahead of the Upper House election next summer.
Yet a diverging view within the LDP remains, with its tax panel chief Yoichi Miyazawa saying that extending the exclusions to processed foods would make it difficult to differentiate between processed foods and those served at restaurants.
Meanwhile, the package concluded Thursday includes measures to revive local economies by expanding a scheme to redistribute corporate tax revenues from big cities to local governments. This would reach about ¥1.4 trillion in fiscal 2017, up from the current total of ¥600 billion.
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