(With Illustrations) Do This Before October! An Easy-to-Understand Guide to the Invoice System

Purpose of Introducing the Invoice System

There are several primary objectives for the introduction of the invoice system as follows:

Eliminating Tax Exemptions

One of the purposes of introducing the invoice system is to address the issue of "tax exemptions." Previously, tax-exempt businesses (sole proprietors and freelancers) with taxable sales of 10 million yen or less were not required to pay the consumption tax they collected from consumers to the government. This is known as "tax exemption." However, with the introduction of the invoice system, tax-exempt businesses are now required to pay the appropriate amount of tax.

Preventing Confusion Between Reduced and Standard Tax Rates

Since October 1, 2019, a reduced tax rate of 8% has been applied to certain products such as daily necessities and food and beverages, while a standard consumption tax rate of 10% has been applied to others, leading to a mix of rates on invoices. Invoices (qualified invoices) that began on October 1, 2023, include additional fields to accommodate these two tax rates, and the total consumption tax amount categorized by tax rate will be recorded.

What Is Purchase Tax Credit?

Purchase tax credit is a system designed to prevent double taxation of consumption tax that occurs during the payment for purchases within a taxable period. When paying consumption tax, the amount of consumption tax on taxable purchases is deducted from the consumption tax amount on taxable sales. Once the invoice system begins, in principle, businesses cannot apply for purchase tax credit unless they receive an invoice.

Registration Is Required to Receive Purchase Tax Credit

At the start of the invoice system, business operators must register to receive purchase tax credit (as an invoice-issuing business). First, you must obtain a registration application form, fill in the necessary information, and submit it to the competent tax office. The deadline for registration applications was originally March 31, 2023, but it was changed to September 30, 2023.

Simply applying does not allow you to issue invoices; it takes about two months after submitting a paper application, or about three weeks for applications via e-Tax (the National Tax Agency's online system).
You can check the time required for notification on the National Tax Agency's "Qualified Invoice Issuer Site."

Requesting Invoices from Suppliers

If you receive an invoice from a supplier, you can apply for purchase tax credit; if you do not, it will not be eligible for the credit. If you fail to receive an invoice, you will effectively lose the consumption tax portion, so caution is required.

Disadvantages of the Invoice System

We will explain the disadvantages of the invoice system in detail.

Risk of Losing Business Partners

If you remain a tax-exempt business, you cannot issue qualified invoices under the invoice system. In other words, since the ordering party will face increased consumption tax payments when dealing with suppliers who cannot issue qualified invoices, they may wish to change their business partners. Therefore, tax-exempt businesses face the risk of losing their business partners.

Increased Operational Burden and Complexity

An increase in the workload for accounting staff is expected. Once the invoice system begins, conventional invoices can no longer be used, and businesses will be required to issue invoices, keep copies, and retain qualified invoices.
Due to the introduction of invoices, businesses must create an invoice for every transaction because of the different applicable tax rates, such as registration numbers and reduced tax rates, which increases the administrative burden.
Furthermore, we do not recommend keeping books in Excel; we suggest utilizing accounting software to handle accounting processes.

Advantages of the Invoice System

Having explained the disadvantages, we will now discuss the advantages.

Eligibility for Tax Credit

By completing the aforementioned registration, businesses can receive purchase tax credit. Under the invoice system, even former tax-exempt businesses are now required to pay the appropriate amount of tax. Therefore, taxable businesses that make purchases from tax-exempt businesses will be able to receive a deduction for the purchase tax amount.

Simplification of Operations Through Electronic Invoices

Electronic invoices refer to the digitization of required qualified invoices. As the demand for electronic invoices increases, the volume of data exchanges will rise, which can significantly reduce transaction processing time.

Reduction of Storage and Management Costs

With electronic data, there is no need for physical storage space. While paper media carries the risk of loss or deterioration, electronic data can be stored in the cloud, allowing you to retrieve data whenever necessary. Additionally, digitization is effective for cost reduction by enabling staff reductions and decreasing the consumption of paper and other supplies.

Elimination of Data Tampering Risks

Electronic invoices are considered to offer improved security compared to paper-based qualified invoices. The Ministry of Internal Affairs and Communications is considering the introduction of electronic signatures (e-seals) that attach qualified invoice business information to electronic invoices, and further security enhancements are expected as adoption progresses.

Required Actions for the Invoice System

We have summarized the specific actions required following the introduction of the invoice system.

Required Information for Purchase Tax Credit Books

To qualify for purchase tax credits, simply receiving an invoice is insufficient. You must record the following items as stipulated by law:

1. Name or title of the supplier
2. Date of the transaction
3. Details of the transaction
4. Transaction amount (including the equivalent consumption tax amount)

Seven-Year Retention Period for Invoices (Qualified Invoices)

Under the invoice system, "Qualified Invoice Issuers" are obligated to retain copies of issued invoices and electronic records. Both the issuer and the recipient are required to store all invoices for seven years. This seven-year retention period begins two months after the end of the taxable period in which the invoice was issued.

Retention Required Even for Invoices Under 30,000 Yen

The provision exempting the retention of invoices for taxable purchases under 30,000 yen is scheduled to be abolished. Therefore, as a general rule, you must retain qualified invoices even for transactions under 30,000 yen.

Summary

The benefits of introducing invoices (qualified invoices) include the ability to develop new business opportunities and streamline operations for electronic invoicing. Early preparation for registration is essential ahead of the upcoming invoice system. In particular, because there are many items to fill out, care must be taken to avoid omissions or errors. Let us begin the necessary preparations now to ensure a smooth transition.

uSonar's corporate data LBC can support you in assigning invoice registration numbers. Please check the details in the document below.