Only three days left before the consumption tax hike in Japan will take place on October 1st. Companies and consumers are getting ready to accommodate the new requirements. However, there seem to be even more controversies popping up as both sides are trying to figure out how the new consumption tax system will work in practice for everyday shopping. Let us take a closer look at what is happening.
To soften the impact of the consumption tax hike, the government of Japan has made a list of products that will be exempt from the hike staying at 8% level. The basic principle is that dining out and goods that constitute daily necessities should not be taxed at 10%. However, as simple as this idea looks, applying it on practice is not so simple at all.
The key challenges in a new two-tier tax system is categorizing products and making sure no one is abusing the reduced tax policies.
The key question is where to draw the line that separates products that are daily necessities and those that are not. While food and non-alcoholic beverages undoubtedly belong to the first group, many have questioned, why such goods as, for example, toilet paper or sanitary products are not exempt from the consumption tax hike. A representative of a tax commission explained that reduced taxes apply only to products that are daily necessities for everyone, which excludes among other things sanitary products for women or diapers for babies.
How to navigate the system?
The distinction between eating-in and take-out is even more confusing due to differences in dining spaces available. What about eating popcorn at the movies versus in the karaoke bar? Or, how about paying for tap water as opposed to the bottled water from the supermarket?
It looks like here the key to answer is the intention of use. Eating popcorn is not the main purpose of going to the movies. Thus, it should be charged at 8% since visitors are taking it out from the cashier into the cinema hall. However, in a karaoke room, which is traditionally also a dining space, the same popcorn will be taxed at 10%. As for water, bottled water is a non-alcoholic beverage that is a daily necessity taxed at 8% while tap water in a household can be used for a variety of things besides drinking and thus will be taxed at 10%.
There is also a risk that buyers might abuse the reduced tax system. For example, purchasing products using 8% benefit and then stay indoors to eat? It seems that for a while Japan will have to rely on conscious approach from the customers. In the meantime, companies are trying to come up with the measures to help their customers navigate this two-tier taxation system.
One of the solutions that would be handy in supermarkets and conbini stores is posters that prompt visitors to inform cashiers about their intention to eat in our out. In particular, 7-Eleven stores that often offer special dining places will use such posters.
Some fast-food chains, like KFC Holdings Japan Ltd., decided to reorganize the price lists so that all prices remain the same and tax inclusive regardless of the dining-in and dining-out preferences. Visitors will see only one price. The company has announced on their website that the key items in the menu will be sold at the old prices while others can get 10-20 yen more expensive as their comparative table shows (in Japanese). Other stores, including Starbucks, announced that they would charge different prices for eat-in and eat-out orders.
Yet, there is no guarantee that buyers will not go to dining space after claiming that are going to eat out. And if they do, it is unclear how the staff should deal with the situation.
What is next?
Everyone seems to be confused about how the new system will work, what issues will come up on the way, and how to handle them. There are many grey areas that need clarifications and less ambiguous wording to better categorize products into different tax categories. SME Japan will keep you updated on the topic as the situation unfolds.
"Otsumami" - a bite size snack:
There is space for improvements in the new consumption tax policies in Japan.