Japan Looks Again At Future Consumption Tax Rises

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

23 November 2011

Following parliamentary approval for the third and largest reconstruction budget on November 21, political discussion in Japan has returned to Prime Minister Yoshihiko Noda’s intentions regarding the proposed increases to the rate of consumption tax.

The government has a medium-term policy target of funding an increase to welfare payments and halving Japan’s primary budget deficit to approximately 3% of gross domestic product by 2015, largely by the means of doubling consumption tax to 10% in stages. It is intended that the timing of the consumption tax increases would be determined by the strength of future growth in the domestic economy.

In a recent forum, Vice Finance Minister Fumihiko Igarashi is reported to have indicated that, on that basis, it is likely that the first 2% or 3% rise in the consumption tax would have to be introduced after October 2013, with another similar increase to be expected in 2015.

He also said that, in his view, an eventual rate of 17% may be necessary in Japan in the longer term, and for a considerable period thereafter, if the country’s social security needs were to be fully met. This would even go beyond the International Monetary Fund’s recommendation that Japan should arrive at a 15% sales tax rate, if it was to achieve fiscal consolidation during the next cyclical economic recovery.

On his return from the various recent Asian regional meetings, and given the resolution of the political problems that had surrounded the passing of the, hopefully-last, reconstruction budget, Noda reiterated his commitment to submit a bill for the gradual consumption tax rate rises to parliament before the end of the current 2011 fiscal year at end-March 2012.

However, while he has committed to calling for a general election (which is due in 2013) before any consumption tax rise is actually implemented, Japan’s opposition parties, that are able to block any government legislation, and are sensing the opportunity of regaining control of the lower house, are continuing to insist that a general election be held now, before they will agree to consider the government’s measures.

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