A Simple Guide to Japan's Tax Hike From 8％ to 10％: What Was Affected and What Are the Exceptions?

Japan's Tax Hike from 8% to 10%

The consumption tax rate in Japan increased from 8% to 10% starting at midnight on October 1st, 2019. Consumption tax was first introduced in Japan in April 1989 at 3% and was increased to 5% then 8% in April 1997 and April 2014, respectively. That makes this the third time that the consumption tax has increased.

With Japan’s aging population and low birth rate, the burden placed on the working population of Japan has continued to increase in order to maintain and support things such as social security. Under these circumstances, if corporation tax or income taxes were raised to source capital for social security, the working population would bear the most burden. That is why the consumption tax raise was considered the best option, so that the entire population would bear the burden as equally as possible.

Unlike previous times, however, this tax hike was quite complicated to understand and remember. The issue lay with the "reduced tax rate" - a policy wherein certain goods and services were not subjected to the increase in tax - which was introduced alongside the increase in consumption tax. Here is a look at how this has impacted tourists in Japan.

What Are Reduced Tax Rates?

Reduced tax rates refer to the reduction of the regular 10% tax rate to 8% for specified products in order to “lessen the burden that falls on widely consumed daily necessities”. The specified products include food/drink products (excluding alcohol and food eaten outside of homes) and newspapers (regular subscriptions to newspapers published at least twice a week). Since food/drink products are consumed more, let's focus on how this tax hike impacted them.

Impacts on Food and Drink Products

The reduced tax rate of 8% is chiefly applicable to rice, vegetables, processed meats, snacks, and mineral water. Alcohol-related products are not eligible in general, with the exception of non-alcoholic beer and alcoholic sweets. Medicinal products and quasi-pharmaceutical products are also not eligible for the reduced tax rate, but certain non-medicinal products (Energy/Vitamin Drinks, Health/Beauty Foods) such as Red Bull and Monster Energy are.

Up until this point, the distinction was basically between whether something is a food/drink product or not, so it wasn't too difficult to follow. The complicated part is when foods consumed outside of homes are not eligible for the reduced tax rate. The specifics regarding this are quite elaborate.

What Are the Rules for Food Eaten Outside of Homes?

What exactly determines whether the food consumed outside of homes are eligible for the reduced tax rate or not? We will explain here the distinctions that can make it difficult to determine whether something is taxed at 8% or 10%.

For example, if a bento box is purchased in a convenience store and eaten outside of it, it is considered a “simple transfer of food/drink products”, so it is eligible for the reduced tax rate (8% tax). If the food is consumed in the eat-in area of the convenience store, however, it is considered “dine-in” and is not eligible for the reduced tax rate (i.e. 10% tax).

Similarly, when food/drinks are purchased as take-out in gyu-don (beef rice bowl) shops like Yoshinoya, Sukiya, and Matsuya, fast food restaurants like McDonald’s and KFC, or cafes like Starbucks, it is treated as a “simple transfer of food/drink products” and eligible for the reduced tax rate. Conversely, the reduced tax rate is not applied for products consumed in the restaurant. As pictured above in Japanese, Starbucks is inquiring about eat-in or take-out at the time of purchase.

When it comes to establishments where the sale of food/drink products is not their main function, it becomes more complicated. For example, if seating is not provided by street vendors or food courts, the products are sold with the reduced tax rate as the “simple transfer of food/drink products”. If seating is available and used, it is considered “dine-in”, so the products are not eligible for the reduced tax rate. Regarding consumption of food/drinks at karaoke, seating is provided, meaning the food/drinks consumed are be eligible for the reduced tax rate.

Movie theaters are even more complicated. You probably have experience going to a movie theater and buying some drinks or popcorn to enjoy during the movie. If the foods/drinks bought at the concession stands are consumed inside the theater while you watch a movie, the purchase is considered “simple transfer of food/drink products” and is sold with the reduced tax rate. If the food/drinks are consumed in a seating area near the concession stand, however, it will be considered “dine-in” and sold with the regular 10% tax.

For establishments where the sale of food/drink products is not their main function, the general rule of thumb is that using the provided seating area determines your purchase as “dine-in” (10% tax) and not using a provided seating area determines your purchase as “take-out” (8% tax).

Snacks That Come with Toys May Not Be Eligible for the Reduced Tax Rate

Take for example the popular Japanese snacks "Bikkuriman Chocolate" (with character stickers) and "Glico Caramel" (with a toy) or sets of tea and teacups. These are eligible for the reduced tax rate as long as the following requirements are met:

1) The price of the product (pre-tax) is under 10,000 yen. 
* Products over 10,000 yen are sold with the regular tax rate with no exceptions.

2) The price of the food/drink product, if sold in a set, must be at least two thirds of the total price.
* For example, if a tea and teacup set is sold for 6,000 yen where the tea costs 4,000 yen and the teacup costs 2,000 yen, the tea is two thirds of the total price, so the set is eligible for the reduced tax rate.

Essentially, the reduced tax rate is only applicable for food/drink products, and if a product’s main component is not the food or drink, it is not counted as a food/drink product.

In the case of the aforementioned snacks, the stickers that come with the Bikkuriman Chocolate are merely extras, and the value of the chocolate exceeds two thirds of the total value, so they are sold with the reduced tax rate. For the Glico Caramel on the other hand, the toy is the main part of the product and since the caramel is less than two thirds of the total value, they are sold with the regular tax rate. Determining these distinctions can be difficult, so you may want to do some research online or ask someone at the store.

In Japan, special campaigns are periodically held where bottled drinks come with an extra item. In these cases, the items are not for sale, and because the bottled drinks with the items are sold for the same price, the value of the extra item is considered as free. Consequently, the value of the food/drink product exceeds two thirds of the total value, so it is sold with the reduced tax rate.

What Else Has Changed?

Cashless payments at registered small/regular businesses between October 1st, 2019 and July 1st, 2020 were eligible for a 2-5% reward-point rebate.

The aim of this rebate system was to soften the impact of the tax hike for a certain period of time after it is implemented. There are two methods to the system: point reward systems for individual services or a discount on the spot equivalent to the point value. For visitors in Japan, the latter has greater merit.

The following are the types of purchases and stores where immediate discounts could be applied:

• Credit card payments including JCB, Sumitomo Mitsui Card, SAISON CARD, UC Card, and Mitsui UFJ NICOS (partial) had a simple process of directly discounting the equivalent point value from the purchase.
• Large convenience store companies (Seven Eleven, Family Mart, Lawson, Ministop) provided a direct discount on the spot equivalent to the point value from the purchase.

Bonus: When Exactly Was the Tax Hike Put in Place?

For services that run 24 hours including taxis, when exactly was the new tax rate put into effect on October 1st?

What About 24-Hour Stores?

Frankly speaking, the exact time of implementation varies by the service or store. The following is some information that was officially announced prior to the change.

• For the three largest convenience store franchises (Seven Eleven, Family Mart, and Lawson): “8% tax [was] applied if the first product is scanned during the 30th of September." As an example, even if midnight struck while the cashier was scanning your items, as long as the first product was scanned during the 30th of September, your entire purchase was taxed at 8%.
• For family restaurants run by the Skylark Group, including Gusto, Bamiyan, and Jonathan’s, customers were given a bill with 8% tax applied at midnight of October 1st. After that, the new 10% tax was applied.
• The 24-hour Sugi Drug Pharmacy had the same policy as the convenience stores: “If the first product is scanned by 11:59:59 pm of the 30th of September, the 8% tax rate [was] applied. Purchases started after midnight [were] subject to the new 10% tax.”
• The karaoke chain Karaoke no Tetsujin “[applied] the new 10% tax starting with the opening of the stores on October 1st”.

What About Taxis?

Like other services, the details of implementation varied by the taxi company. Teito Motor Transportation, a large taxi company, announced that taxi rides that started before midnight and ended afterwards would still be charged with the 8% tax. Likewise, Sanwa Kotsu Taxi stated that the 10% tax was only applied from the morning shift taxis on October 1st.

This was a simple summary of the consumption tax rate revision to explain some of the complicated details for foreign visitors in Japan. This information will hopefully come in useful when you're shopping and sightseeing around Japan!

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