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Japan's Planned Consumption Tax Hike 'Not Enough' Says IMF

by Mary Swire,, Hong Kong

28 May 2015

The Japanese Government will probably need to increase consumption tax beyond the rise scheduled to take place in 2017 if it is to achieve its fiscal consolidation targets, the International Monetary Fund (IMF) has said.

In its 2015 review of the Japanese economy, the IMF said that while efforts to contain increases in social security spending are appropriate, they will not be enough on their own to eliminate the budget deficit and that additional measures to bring in more revenue will be required.

The IMF welcomed the approval of legislation to reduce the corporate tax rate and to widen the corporate tax base, intended to encourage business investment. However, it argued that further increases in the consumption tax will be required given the need for "significant medium-term adjustment" to put government debt on a downward trajectory.

The IMF also urged the Government to avoid multiple consumption tax rates, which would soften the blow of the increase in the main rate, and recommended that it maintain a wide consumption tax base.

On March 31, Japan passed legislation to adopt tax reform proposals for the 2015 fiscal year, including the planned corporate tax cuts and the postponement of the country's second consumption tax rate increase from 8 percent to 10 percent.

In a first step, the corporate tax rate was lowered to 32.11 percent on April 1, 2015. From fiscal year 2016, it will be cut to 31.33 percent. The legislation also includes provisions to recoup much of the lost revenue from the rate reduction by broadening the corporate tax base, largely through a reduction in the amount of previous losses that can be set-off against declared business income.

The legislation also modified the consumption tax law, postponing the sales tax hike scheduled for October 2015 by 18 months to April 2017 because of weakness in the Japanese economy. However, the bill eliminated a provision that would enable further postponements.

The decision to further defer the consumption tax rise resulted in Fitch Ratings downgrading Japan's long-term credit rating to 'A' from 'A+' in April. The ratings agency pointed out that the Japanese Government "did not include sufficient structural fiscal measures in its budget for the fiscal year April 2015-March 2016" to replace the programmed consumption tax rate hike that was "the centerpiece of its medium-term fiscal consolidation effort."

TAGS: tax | business | value added tax (VAT) | sales tax | law | budget | International Monetary Fund (IMF) | legislation | tax rates | social security | tax reform | Japan

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