Japan’s ruling parties broadly agreed Thursday to exempt food products from the planned consumption tax hike in 2017, lawmakers said, in an attempt to ease the burden on consumers as slow growth in household spending has weighed on the economy.
All fresh and processed foods will remain subject to the current 8 percent tax even after the rate is raised to 10 percent in April 2017.
But the arrangement will reduce state revenue by some ¥1 trillion ($8.2 billion) annually, forcing the government to find other sources to cover the loss at a time when welfare spending is increasing due to the country’s graying population.
Prime Minister Shinzo Abe’s Liberal Democratic Party and its junior coalition partner, Komeito, aim to reach a detailed agreement on Friday, the lawmakers said.
Some LDP members had wanted fewer food items to be subject to the lower tax rate, while Komeito had pressed for including all food products.
“We made a significant change of course and need a bit more time,” a senior LDP lawmaker said.
The tax panels of the two parties approved earlier in the day tax reform plans for fiscal 2016 starting next April, including further corporate tax cuts that Abe hopes will encourage companies to raise wages and boost investment.
The agreement to introduce the multiple consumption tax rates will be included in the reform plans, which will be submitted to the Diet in January following approval by Abe’s Cabinet.
Under the reform plans, the effective corporate tax rate will be reduced to 29.97 percent in fiscal 2016 from the current 32.11 percent, considered relatively high by global standards and causing disadvantage for Japanese firms. The rate will be further cut to 29.74 percent in fiscal 2018.
“The Japanese economy is poised to overcome deflation,” the LDP said in the plans. “To ensure a virtuous economic cycle, it is necessary to enhance corporate earning power to lift domestic investment and wages.”
The tax reform is intended to support Abe’s bid to boost Japan’s gross domestic product to ¥600 trillion in about five years in the face of the country’s graying population and declining birthrate.
That goal for fiscal 2020 represents an expansion of more than 20 percent from ¥490 trillion in the past year to March. But skepticism is growing among economists over whether the target is achievable.
To make up for the decline in corporate tax revenue in fiscal 2016, the government plans to scale back measures to ease taxes on companies making losses.
And for the additional corporate tax cut in fiscal 2018, the government will shrink the scheme that allows companies to deduct past losses from profits for 10 years.
To revive local economies, the government will expand a scheme for redistributing corporate tax revenue to local governments to about ¥1.4 trillion in fiscal 2017 from the current ¥600 billion.
The government will also introduce a new tax on vehicle purchases, with tax rates varying in accordance with fuel efficiency.
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