Japan Delays Consumption Tax Increases

by Mary Swire, Tax-News.com, Hong Kong

23 June 2011

With Japan’s Prime Minister Naoto Kan under extreme political pressure, the committee of the ruling Democratic Party of Japan (DPJ) dealing with the government’s tax and social security reforms has postponed a decision on the proposed increases to consumption tax.

An official panel, established by Kan to work on proposals to finance the rapidly-rising costs of pensions and health care in Japan, had recommended that the country’s consumption tax, currently at 5%, should be raised to provide additional tax revenue.

The panel’s proposal to the government was that consumption tax should be raised in stages, so as not to affect the country’s economic growth prospects. It proposed that the present tax rate should be increased to 10% in two stages by 2015, with the first hike in the next fiscal year from April 2012.

However, the DPJ has now shied away from agreeing such a move, citing the possible economic effects of a tax rise at the present time and a need to increase taxes only when an economic recovery is better established.

Given the current political uncertainty, with the timing of Kan’s resignation being openly debated, the DPJ is increasingly nervous about a policy of consumption tax increases, as a similar suggestion for doubling the tax became a major cause of its losing its majority in the parliamentary upper house last year. In addition, the parliamentary opposition parties are refusing to cooperate with the DPJ until Kan’s resignation is a fact.

In the meantime, the supplementary budgets to finance reconstruction after the earthquake and tsunami in March could also be delayed. A second supplementary budget of some JPY2 trillion (USD24.9bn) is planned in the next few weeks (if the current parliamentary session can be extended), and a third, larger, JPY10bn budget is due by September this year.

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