Fraud by shoppers reselling tax-free goods prompts reform
Japan has revised its Consumption Tax exemption system for foreign visitors to curb the resale of tax-free goods within the country. Current thresholds for Consumption Tax refunds and a broadening of goods entitled to a tax repayment are updated.
The reforms will bring Japan into step with most other countries’ tourist VAT/GST refund regimes.
The current Consumption Tax rate is 10%, with an 8% lower rate for essentials.
The changes are set to take effect in April 2025.
2025 tax refunds at airport instead of store deduction
Starting in 2025, Japan will implement a new tax-free shopping system for international tourists, replacing the current practice of deducting taxes directly at checkout. The updated process introduces a refund system designed to enhance convenience and security, supported by modern technology.
The new system will work as follows:
- Pay Full Price at Stores: Tourists will pay the total cost of their purchases, which includes Japan’s standard 10% consumption tax and an 8% tax for food items.
- Keep Receipts: Ensure you collect and keep all receipts for eligible purchases.
- Claim Refund at Departure: At the airport, submit your receipts to customs to process your tax refund. Refunds must be claimed within 90 days of purchase to confirm that the goods are leaving Japan.
Ending spend limits; simplified rules eligibility of goods
- No Minimum or Maximum Spend Limits: Previously, tourists needed to spend at least 5,000 JPY in one store in a single day to qualify for tax-free shopping, with limits between 5,000 and 500,000 JPY for consumables like food or medicine. The new system removes these restrictions, allowing unlimited tax-free purchases.
- Simplified Packaging Requirements: The old rules required consumables to have specific packaging to qualify for tax exemptions, which could make shopping inconvenient. These requirements will be eliminated, streamlining the process while ensuring better control over unauthorized reselling.
- Unified Categories for Goods: The separation of “general” goods (e.g., clothing) and “consumables” (e.g., food, cosmetics) may be removed, making everyday items more accessible for tourists.
This updated system aims to create a smoother shopping experience while balancing oversight and convenience for international visitors.
The government, along with the ruling Liberal Democratic Party, intends to shift from the current system, where taxes are deducted at the time of purchase, to one where taxes are refunded only after confirming that the visitors have taken their purchases out of Japan.
Japan’s tax exemption system, which allows visitors to buy goods without paying consumption tax by presenting identification like a passport, is distinctive. However, an investigation of 57 visitors who each bought tax-free goods worth over ¥100 million in 2022 revealed that only one actually took the items out of the country. The remaining 56, who were obligated to pay the tax, left Japan without doing so, resulting in ¥1.85 billion in unpaid taxes.
Consumption Tax refunds
Tax refund in Japan applies to all items, from general items such as home appliances, accessories, and shoes, to consumable items such as alcohol, food, cosmetics, cigarettes, and medicines.
Purchases that total 5,000 yen or more qualify for a tax refund. The relief only applies to foreign visitors in Japan temporarily.
What items are excluded
- Delivery fees and service charges not eligible for tax refund
- Alcohol
- Frozen items are not eligible for any tax refund
Consumption Tax versus Value Added Tax
Japan’s Consumption Tax and Value Added Tax (VAT) are similar in that both are forms of indirect taxation applied to goods and services. However, there are some key differences between the two:
Application:
- Consumption Tax: In Japan, the consumption tax is a flat rate applied to most goods and services at the point of sale. The tax is typically included in the price and is paid by the consumer.
- VAT: VAT is also applied at each stage of production and distribution, but the tax paid on inputs can usually be deducted by businesses, so only the value added at each stage is taxed. The end consumer ultimately bears the full burden of VAT.
Tax Rates:
- Consumption Tax: Japan’s consumption tax rate is currently set at 10%, with a reduced rate of 8% for certain essentials like food and beverages (excluding alcohol and dining out).
- VAT: VAT rates vary by country, with rates typically ranging from 5% to 27% depending on the country and the goods or services in question. Many countries also have different rates for various categories of goods.
Exemptions and Reduced Rates:
- Consumption Tax: Japan offers a reduced rate for certain essentials and has specific exemptions, such as for education and medical services.
- VAT: Many countries with VAT also have reduced rates or exemptions for essentials like food, books, and medicine, but the specifics vary widely by country.
