Amid jittery markets, Japan's ruling coalition has agreed to extend a scheme offering stock investors lower rates of capital gains and dividend tax, but has delayed a decision on whether to raise consumption tax.
The tax breaks, which halved the tax rate to 10% on capital gains and dividends, were due to expire at the end of 2008 (for capital gains) and March 31, 2009 (for dividends), and the government had considered letting the scheme lapse to bolster much-needed revenues. But with the fallout from the US sub-prime mortgage crisis and high oil prices continuing to send nervous ripples through the Japanese equity markets, the coalition has decided to retain the tax breaks for another two years to encourage stock investment.
However, the scheme has been restricted so that the 10% tax rate will apply to only the first 5 million yen (US$44,300) of capital gains and 1 million yen in dividends.
The coalition faces a battle to get the proposal implemented as it is not supported by the opposition Democratic Party, which holds a majority in the upper house of parliament.
It has also emerged that the more contentious decision on whether to increase the 5% consumption tax has been put off once again by the coalition.
While there seems to be a growing consensus that the tax, which is low compared to similar levies in other industrialised economies, should be increased to help pay for Japan's growing social security burden, such a move would be highly unpopular with the public and the government is mindful that it could face an election next year.
According to Japanese Prime Minister Yasuo Fukuda, it is "too early to tell" when the consumption tax should be increased.
"We have to consider the issue of the social welfare system first," he told reporters on Thursday.
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