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Political storm in Japan over sales tax relief plan
September, 17th 2015

Shoppers in Japan may have to hand over their tax ID number every time they go to the supermarket as part of a unique, controversial plan to ease the pain of a rise in consumption tax.

Under the proposed system, consumers would be able to apply online for a 2 per cent rebate on essential purchases such as food, according to officials at the Ministry of Finance. That would offset some of a planned rise in consumption tax from 8 per cent to 10 per cent.

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But the proposed system has triggered a storm of criticism, highlighting the deep unpopularity of the sales tax, and the political obstacles to raising taxes Japan needs to support its ageing population.

“This is nothing like the reduced rate we’ve been calling for,” said Makoto Nishida, secretary-general of the Komeito party in the upper house. “The concept is not the same.”

As well as stoking tensions between Prime Minister Shinzo Abe and his Komeito coalition partners, the dispute pits the technocratic ministry of finance against populist politicians, and Japan’s acute need for revenues against the burden of consumption tax on lower-income households.

“I think MOF managed to deliver a plan that is logical but not terribly politically savvy,” said Tobias Harris, who follows Japan at Teneo Intelligence. “MOF may be counting on the Abe government’s desire to boost tax revenues?.?.?.?but I suspect that politics will triumph.”

Mr Abe intends to raise consumption tax in April 2017 after he postponed an increase planned for this year. Sales tax revenue is built into all of his plans to tackle a gaping budget deficit at a time of rapidly rising healthcare costs.

The finance ministry wants to avoid creating the kind of two-tier consumption tax system common in Europe, with preferential rates for food and other necessities.

Officials argue that keeping sales tax at 8 per cent for all food excluding alcohol would cost Y1.3tn ($11bn) in tax revenues, while a limited exemption for fresh food would lead to painful bureaucratic disputes over definitions, such as whether raw fish becomes processed when put on a ball of rice.

Under its system the rebates would be capped, perhaps at Y4,000 a year. That would let MOF keep a single tax rate, control the loss of tax revenues, and limit the amount recouped by wealthy, high-spending customers.

Bank of Japan officials are keen to see some kind of offset against the next consumption tax rise after the last increase, from 5 per cent to 8 per cent in April 2014, pushed the economy back into recession.

There is particular concern about the impact on households with a fixed income, such as pensioners and low-wage workers, who spend much of their income and are hit disproportionately by sales taxes. The government is planning some temporary income tax credits for low earners.

Opinion polls show more than 70 per cent of the public against the MOF proposal, with politicians lining up to criticise it as costly, convoluted and impractical.

Komeito is particularly determined to secure a concessionary sales tax rate, having made it the centrepiece of its 2014 election manifesto. The conservative, Buddhist party has relatively few seats in parliament but its voters are crucial to Mr Abe’s Liberal Democratic party in first-past-the-post elections.

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