Measures meant to offer relief from sales tax hike pose baffling riddles instead

With Japan’s consumption tax rate hike to 10 percent scheduled for the start of next month, the government promises to simultaneously introduce a reduced rate for everyday essentials — mostly food and non-alcoholic beverages — to ease the financial impact on lower income households.

The measure pushed by Komeito, the junior ruling coalition partner of the Liberal Democratic Party, will maintain the current rate of 8 percent on certain products and is estimated to save households about ¥1 trillion a year, according to the Bank of Japan.

Despite that, criticism has poured in.

Some say the two-tier system is too complicated for businesses and consumers to manage; others question its effectiveness in delivering the benefits promised.

How complicated will Japan’s new system be? Here is what consumers should expect on Oct. 1.

How do the different tax rates work?

Under the National Tax Agency’s guidelines, food and non-alcoholic beverages will be exempt from the rate increase, as will subscriptions for printed newspapers published twice or more a week.

But this rule has drawn criticism from many consumers who have asked why non-food daily necessities, such as toilet paper and sanitary goods, are excluded from the reduced rate list when the newspapers are included.

Makoto Nishida, who heads the Komeito’s tax commission, has defended the decision. In an interview published on the party’s website, he points out that paper diapers and sanitary goods as a daily necessity for babies and women, but “not so for everyone compared with food and non-alcoholic beverages.”

The two-tier system itself is not straightforward, either.

One example that may prove particularly taxing is the 10 percent rate being applied when people eat at restaurants but the 8 percent rate being used for to-go purchases — in some cases from the same outlet.

When you go to a fast food store or restaurant, the clerk typically asks if you want to eat on the premises or take your purchases away.

But what if you go to convenience stores that also offer eat-in spaces?

In that case, stores will need to confirm customers’ intentions, such as by displaying posters that ask them to tell the clerk that they will eat in. Then the clerk will charge the 10 percent tax rate.

But the question remains: What if customers use an eat-in space after paying the 8 percent rate?

At Seven-Eleven stores, which plans to put up such posters, a clerk will ring the purchase up at 8 percent “unless customers say that they will use the space,” according to a spokesman at Seven & I Holdings Co.

Will customers receive different rates if they want to drink their coffee in the eat-in space but take out a rice ball bought at the same time?

The spokesman told The Japan Times that different rates will apply — 8 percent for the rice ball and 10 percent for coffee.

As paying for items at the checkout is expected to take longer than before, the spokesman said that the convenience store chain’s cash register system “has been revamped to make sure the process goes as smoothly as possible.”

Are there any other confusing examples?

The guidelines also list more detailed examples of purchases that will qualify for the lower rate.

Quiz time: When do the 8 percent or 10 percent rates apply?

Tap water (home water bill) and bottled water

Catering by a chef to serve food for an event, and food deliveries

Popcorn eaten at a movie theater versus at a karaoke box

Oronamin C and Lipovitan D energy drinks

Tap water will be taxed at 10 percent, bottled water at 8 percent. The government makes a distinction between them based on purpose: Water from a tap may be used for other purposes besides drinking.

Catering by a chef for an event is charged at 10 percent, as the government excludes “providing food and beverages which involve cooking or heating prepared food or serving them at a designated site” from the lower rate. Simply ordering food to be delivered will be subject to the 8 percent rate.

Tax on popcorn at cinemas is 8 percent because movie-goers are taking the snack out of the concession stand into a theater, which is intended mainly for watching a movie rather than for eating or drinking.

Eating a snack at a karaoke box will see tax applied at 10 percent, because a karaoke room is considered an eating space.

And tax on Oronamin C will be 8 percent, but tax on Lipovitan D will be 10 percent; while Oronamin C is a regular energy drink, Lipovitan D is a health ministry-designated quasi-drug.

What have restaurants and cafes done to prepare for Oct. 1?

Some have decided to charge the same tax-inclusive price for eat-in and takeout, including fast food chains Kentucky Fried Chicken, McDonald’s, Sukiya gyūdon beef-bowl outlets, and Italian restaurant chain Saizeriya.

This will be done by cutting the food price for eat-in items so that when 10 percent is tacked on, the tax-added price is the same as that for takeout.

“We will unify the tax-inclusive prices for our menu, regardless of eat-in or takeout, to make it easy for customers to understand,” reads the website of KFC Holdings Japan Ltd.

The company also says some of its flagship items will keep their current tax-inclusive price, such as pieces of chicken that currently cost ¥250 each. The prices for biscuits and other foods will be bumped up by between ¥10 and ¥20.

Saizeriya Co. will keep all the items on its menu, except alcoholic beverages, at the current tax-inclusive price.

On the other hand, coffee shops Starbucks and Tully’s Coffee, fast food chain Mos Burger and restaurant chain Royal Host, for example, will charge different tax-inclusive prices for eat-in and takeout.

How has the new tax regime been received?

Young people seem to have mixed feelings.

An online survey by the nonprofit organization Nippon Foundation on 1,000 teens from 17 to 19 years of age showed that 36.2 percent were in favor of the lower tax rate while 34.9 percent were not.

The most cited reason for supporting it was “retaining 8 percent for daily necessities,” while that for opposing it was “the ambiguous definition of what constitute necessities, dining out, as well as food and beverages.” The survey was conducted between July 26 and 28.

Toshihiro Nagahama, chief economist at the Dai-ichi Life Research Institute Inc., is in the “against” camp.

Nagahama says the system “defeats the purpose of alleviating the regressive nature of consumption tax” because higher income earners tend to spend a lot of money and so will gain more. He believes people on really low incomes are more likely to eat at a cheap restaurant, rather than buy groceries and cook food at home.

The economist proposed tax credits and rebates as a “much better approach” for low-income earners.

Nagahama also cautioned that the complex categorization of what is eligible for the 8 percent rate may prompt lawsuits, as have been seen in the U.K. where multiple rates have also been adopted.

In 2009, a court battle between tax authorities and food giant Procter & Gamble ended in defeat for the company after it claimed Pringles were not potato chips and are therefore not subject to the U.K.’s Value Added Tax, or VAT.

Foodstuffs are generally exempt from VAT in the U.K., but potato chips are not.