1 Percent Consumption Tax on Foods Looms Up

Prime Minister Sanae Takaichi promised the voters in the Lower House election in February that she would eliminate consumption tax on foods. As she still hopes to start that reduction of consumption tax by the end of March 2027, the members of national conference on social security are pessimistic for the implementation. There came up an option to reduce the tax rate not from current 8 percent to 0, but to 1 percent. 

“It has been my long-cherished wish,” said Takaichi on elimination of consumption tax cut in her press conference on January 19th, when she announced dissolution of the Lower House and ensuing election in February. At the time she ran for presidential election of the Liberal Democratic Party (LDP) in last October, Takaichi was negative on the issue, because of complication in system reform and low efficiency for low-income families. Takaichi’s attitude has occasionally been changed several times.

 

After a sweeping victory in the Lower House election, emboldened Takaichi assembled a national conference to implement her campaign promise of 0 percent consumption tax on foods. The conference accumulated its meeting since late February.

 

Takaichi requires that the conference concludes the discussion by this summer, her government submit and pass a related bill in the fall session of the Diet and introduce new tax rate within FY2026. If she persists on 0-percent tax on foods, it is unlikely for system reform of retailers, which is necessary to apply to new tax rate, to catch up her schedule. The LDP members of the conference began to consider the option of introducing 1 percent food tax.

 

In the meeting on March 8th, a developer of POS (Point of Sale) system for retailers explained that they could reform current POS system within three months, if the rate of consumption tax on foods was going to be anything but 0 percent. Current POS system is designed for imposing certain amount of consumption tax on foods. 0 percent is not assumed. If the tax rate is reduced from current 8 percent to 0 percent, it needs a complicated revision of system. But if it is set at 1 percent, it takes only three months.

 

There are other negative reasons in the national conference against introduction of 0 percent consumption tax on foods. It is supposed that consumers prefer buying foods in supermarkets to having dinner in restaurants, if the tax is eliminated. Farmers in agriculture, most of whom are small business owners with exemption of paying consumption tax, will reduce their benefit of current system.

 

The elimination of consumption tax on foods causes decline of 5 trillion yen a year of revenue in national budget. The government needs to find alternative fiscal resource for this consumption tax cut. As 40 percent of revenue from consumption tax is distributed to local governments, it may affect finance of municipalities. Those conditions encourage leading parties to consider 1 percent consumption tax on foods.

 

However, Takaichi’s promise in the election campaign was not 1 percent, but 0 percent. 1 percent food tax does not fulfill her campaign promise. If she compromises at 1 percent consumption tax on foods, it may cause some decline of approval rate for her. 

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