Japan's Government Agrees Plan For Consumption Tax Hikes

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

02 January 2012

Japan’s Prime Minister Yoshihiko Noda has been able to fulfil his government’s target to produce, before the end of this year, a detailed plan for future consumption tax rises, but only after his personal intervention at a meeting of the ruling Democratic Party of Japan (DPJ).

The government has a long-held medium-term policy of funding Japan’s increasing social security costs and halving its primary budget deficit by 2015, largely by the means of doubling consumption tax to 10% in stages.

Noda had previously given a 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. He has been looking for the DPJ’s agreement, by the end of this year, to a programme as to when, and by how much, successive tax hikes would occur.

It had been indicated that the timing of the consumption tax increases would be determined by the strength of future growth in the domestic economy, and that, in that case, it was said to be likely that the first 3% rise in the consumption tax, to 8%, would have to be introduced in October 2013, with another similar increase to be expected in 2015.

However, after a fractious discussion in the DPJ, and after a number of threats to defect from the party, Noda has had to agree to a delaying of the first consumption tax rise to April 2014, with the final 2% increase to 10% in October 2015.

It is now expected that Noda will put the tax increase programme to the opposition parties, and incorporate their views, before legislation is presented in parliament in the first quarter of 2012.

However, the DPJ’s main parliamentary opposition, the Liberal Democratic Party, which is 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 (which is due in 2013) be held before they will agree to consider the government’s measures.

So far, Noda has only committed to calling for an election before any consumption tax rise is actually implemented, but may have to make further concessions, both on this and the government’s 2012/13 budget proposals, before he can make any significant progress.

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