How Does Japanese Consumption Tax (JCT) Work?

In order to be able to talk about the Qualified Invocing System (QIS), it is first important to give a general indication of how the Japanese Consumption Tax (JCT) works and why the mechanism of the tax has forced the Japanese tax authorities to introduce certain rules.

E-invoicing in Japan

There are no regulations in Japan requiring taxpayers to show JCT on the invoice (neither the rate nor the amount). Moreover, in order to determine the taxpayers’s obligations to the tax authorities (how much is supposed to be paid and how much JCT tax can be deducted), the book-keeping records are sufficient. This solution worked well until the end of September 2019, with a single JCT rate of 8%. On 1 October 2019, a second JCT rate of 10% was introduced, while the reduced rate of 8% remained.

The introduction of different rates caused some JCT taxpayers to account for JCT input tax erroneously, because they could not rely on a tax invoice containing the correct JCT rate and amount.

Ongoing E-invoicing Changes

Therefore, this was the first step in the reforms, which include the implementation of the QIS which will come into force on 1 October 2023, and will operate similarly to the well-known VAT system in Europe. Under this system, it will be necessary to issue invoices (in paper and electronic format), which contain specific information (the issuer's tax ID, the recipient, the date of issue, the item, and the amount of tax per tax rate) and then store them. To be able to issue such a qualified invoice, taxpayers must register with the Japanese National Tax Authority (NTA) by the end of March 2023 to receive an individual tax ID. With the entry into force of the QIS, only registered economic operators will be able to issue a qualified invoice, and only the possession of such an invoice will entitle a business to claim input JCT charged on purchases.

As the E-invoice Promotion Association (EIPA) points out, their electronic invoice in PINT format meets the requirements of the new qualified invoice. Therefore, it strongly encourages businesses to exchange e-invoices through the PEPPOL network. However, it is worth emphasizing that electronic invoices are not mandatory in Japan, at any level.

There’s more you should know about e-invoicing in Japanlearn more about the new and upcoming regulations.

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