The purchase tax credit allows taxable businesses to take deductions when paying consumption tax incurred on purchases. In this article, we will provide basic knowledge of the purchase tax credit for consumption tax, current requirements for obtaining the purchase tax credit, and special exceptions and transitional measures under the Invoice System.

What's in this article?

• What is the purchase tax credit?
  
• What if I don't obtain the purchase tax credit?
  
• Can I obtain the purchase tax credit for amounts less than ¥30,000?
  

What is the purchase tax credit?

The purchase tax credit lets you avoid paying consumption tax twice for the same item. You declare and pay it after deducting the consumption tax on purchases from the consumption tax on sales.

Consumption tax is levied twice – on transactions involving either two businesses or a business and a customer.

• Consumption tax on taxable purchases
  When a business purchases materials from a seller to make a product, it is required to pay consumption tax to the seller based on the price of the materials it purchased (e.g. eggs, flour and other ingredients purchased by a bakery).

• Consumption tax on taxable sales
  Consumption tax is also levied on that product when it is sold. When customers purchase the product from a business, they pay consumption tax to the business based on the product price (e.g. bread made from the purchased eggs, flour and other ingredients, which is subsequently sold for purchase).

From the above example, consumption tax is levied twice – once when a business purchases materials from a seller and again when a customer purchases goods or services from that business. To avoid such a dual tax payment, the purchase tax credit allows businesses to deduct the consumption tax paid on the purchased materials from the consumption tax received from the customer.

Let's look at an example calculation of the purchase tax credit.

Say you had the following product sale price and price of purchased materials:

Product sale price: ¥4,400 (¥4,000 for the product and ¥400 in consumption tax)

Price of purchased materials: ¥1,100 (¥1,000 for the materials and ¥100 in consumption tax)

Here's how you would calculate the purchase tax credit:

¥400 Consumption Tax Received at Time of Sale – ¥100 Consumption Tax Paid at Time of Purchase = ¥300 Consumption Tax to be Paid

Now that the Invoice System has started, retaining qualified invoices that the seller issues is a requirement for the buyer's business in order to obtain the purchase tax credit. Furthermore, in order for the seller to issue a qualified invoice, the seller must be a taxable business that has pre-registered as a "qualified invoice issuer". Accordingly, when a business that has registered with the Invoice System issues an invoice to a buyer, the invoice includes a registration number indicating that the business is a qualified invoice issuer.

What is eligible for the purchase tax credit?

Generally, the definition of "purchase" is anything directly related to sales – for example, raw materials and products. However, a wide range of categories are eligible for the purchase tax credit.

Purchases eligible for the purchase tax credit are not limited to just raw materials and goods. As shown below, expenses incurred for the sale of products in the course of business are also eligible for the purchase tax credit – as long as those expenses are taxable:

• Advertising and promotion expenses, communication expenses, utility expenses, consumables and other expenses related to selling products
  

For more information, refer to the Japanese National Tax Agency's web page on items eligible for the purchase tax credit. Note that the purchase tax credit can only be obtained for taxable purchases that are part of transactions with external suppliers.

Import consumption tax is also eligible for the purchase tax credit

Taxable goods imported into Japan from overseas are also eligible for the purchase tax credit. Normally, when products are purchased overseas for use within Japan, they are classified as duty-free transactions, which are exempt from consumption tax. However, after the product arrives in Japan, you will be required to pay consumption tax at customs when picking up the product at a bonded area. In this case, an import licence is required for the purchase tax credit instead of a qualified invoice. For more information, see section 5 on import licences on the National Tax Agency's website.

What if I don't obtain the purchase tax credit?

The consumption tax on purchases that your business pays to sellers when purchasing materials can be deducted from the consumption tax on sales that you later receive from customers, thereby reducing the amount of consumption tax that your business pays.

If you don't use the purchase tax credit, the amount of consumption tax you pay will increase, which may be a burden on your business. In other words, if the seller is unable to issue a qualified invoice, the buyer will not be able to obtain the purchase tax credit. In such cases, the buyer may reconsider engaging in the transaction, which is a risk for the seller. Therefore, it is important for tax-exempt businesses and other businesses that are not permitted to issue qualified invoices to carefully consider the advantages and disadvantages of introducing the Invoice System.

For tax-exempt businesses facing this decision, transitional measures have been established for a six-year period from the start of the Invoice System (1 October 2023 to 30 September 2029). We will discuss these measures in detail below.

What are the transitional measures for transactions with tax-exempt businesses?

Under the Rate-Classified Invoice Retention Method, which ended when the Invoice System started on 30 September 2023, taxable purchases from tax-exempt businesses were also eligible for the purchase tax credit. However, under the current Invoice System, tax-exempt businesses are not allowed to issue qualified invoices that meet the requirements for the purchase tax credit. This makes purchases from such businesses essentially ineligible for the purchase tax credit.

Because of this, Japan has established transitional measures for tax-exempt businesses for a specific time period. During that period, the purchase tax credit can be applied to transactions with tax-exempt businesses.

Transitional measures

In the case of taxable purchases from tax-exempt businesses, a certain percentage of the consumption tax equivalent on purchases can be treated as the consumption tax, and a deduction can be obtained, under the above-mentioned transitional measures. These measures are valid for a six-year period from the starting date of the Invoice System. Details are shown below:

• From 1 October 2023 to 30 September 2026: 80% of the consumption tax equivalent on purchases
  
• From 1 October 2026 to 30 September 2029: 50% of the consumption tax equivalent on purchases
  

The start of the Invoice System did not completely abolish the purchase tax credit for transactions with tax-exempt businesses. Rather, as stated above, the plan is to gradually abolish the purchase tax credit in such cases over a six-year period. The purchase tax credit in such cases will be completely abolished on 1 October 2029, upon the end of the transitional measures.

What is the 20% special exception?

If a business that was originally tax exempt becomes a taxable business in order to issue qualified invoices under the Invoice System, it can obtain the 20% special exception. This is when the amount of consumption tax paid is 20% of the tax amount on sales (applicable periods for this are taxable periods falling from 1 October 2023 to 30 September 2026).

Can I obtain the purchase tax credit for amounts less than ¥30,000?

The tax credit for purchases can be applied even when the purchase price of services or goods is less than ¥30,000. However, even in this case, in principle, the delivery and preservation of a qualified invoice is required in order to receive the credit for taxable purchases. Therefore, even if the purchase price is only a few hundred yen, the buyer is usually required to receive a qualified invoice.

On the other hand, although there are limited requirements, the following special and transitional measures that exempt the preservation of qualified invoices can be used when applying for the credit on taxable purchases for transactions of less than ¥30,000 or less than ¥10,000.

What is the exemption from issuance obligation for amounts less than ¥30,000?

Special exceptions have been established for small transaction amounts of less than ¥30,000, such as those listed below. These exceptions are made because it may be difficult to obtain receipts for such transactions.

• Public transport (bus, rail, ship) fares less than ¥30,000
  
• Purchases of less than ¥30,000 from vending machines and other automated service equipment (e.g. purchases of food and drinks, services such as coin-operated lockers and launderettes, ATM services at banks, etc.)　
  

Similar to the small-amount exception, you can apply the purchase tax credit to the above two types of transactions of less than ¥30,000 simply by recording certain items in a ledger, and you are exempt from the obligation to issue a qualified invoice. However, it is important to note in advance that the special exceptions do not apply to some transactions made using vending machines and automated services. For details, refer to the National Tax Agency's page on the exemption from issuance obligation.

For other cases when you only need to keep a ledger listing certain items, with no need for a qualified invoice, refer to the National Tax Agency's page on cases when a purchase tax credit is allowed by keeping a ledger only. And for special exceptions for exemption of the duty to issue or retain qualified invoices, refer to the NTA's overview of methods for retaining qualified invoices.

What is the small-amount exception?

Measures to reduce the administrative burden on businesses below a specific size (small to medium-sized enterprises, or SMEs, etc.) have been implemented for the period from 1 October 2023 to 30 September 2029. Specifically, if taxable purchases are less than ¥10,000, there is a small-amount exception that allows businesses to obtain the purchase tax credit simply by recording certain items in a ledger.

Businesses below a specific size that are eligible

• For corporations: Taxable sales in the "base period" (two fiscal years prior) of ¥100 million or less, or taxable sales in the "specified period" (the first six months of the previous fiscal year) of ¥50 million or less
  
• For sole proprietorships: Taxable sales in the "base period" (two years prior) of ¥100 million or less, or taxable sales in the "specified period" (January to June of the previous year) of ¥50 million or less
  

What are the items to be recorded in the ledger?

• Name (or business name) and address (or location) of the other party involved in the taxable purchase
  
• Date of the taxable purchase
  
• Assets or services related to the taxable purchase
  
• Amount paid for the taxable purchase
  
• Statement that the purchase falls under one of the categories for which the purchase tax credit is allowed simply by recording in a ledger
  

For details regarding which items are to be recorded in the ledger, refer to the National Tax Agency's page on bookkeeping under the qualified invoice storage method.

What support does Stripe provide for the Invoice System?

Stripe allows you to create qualified invoices in compliance with the Invoice System. We provide a variety of tools and features to help you run your online store or service, and you can start using Stripe's various tools by registering an account. For more information, you can read our guide to invoice compliance or our doc on best practices for setting up qualified invoices.