The background of the introduction of the invoice system dates back to April 1989, when consumption tax was first established. At that time, due to public opposition, a tax-exempt business system was adopted, which exempted certain small-scale businesses from the obligation to pay taxes. This exempted tax is known as "profit tax."
Starting October 1, 2023, the primary purpose of the invoice system is to eliminate "profit tax" by requiring businesses to pay the consumption tax collected from consumers to the government rather than retaining it as their own profit.
Benefits of the Invoice System
Accurate Recording of Reduced Tax Rates
In October 2019, the consumption tax rate was increased to 10%, and a reduced tax rate of 8% was introduced for certain items such as daily necessities and food and beverages. With the invoices currently in use, different consumption tax rates are mixed, requiring recalculations for each individual product based on its respective tax rate.
By introducing the invoice (qualified invoice) system, companies can accurately record the consumption tax amount and consumption tax rate, thereby achieving business simplification.
Prevention of Fraud
The invoice system is effective in preventing tax fraud. With the introduction of reduced tax rates following the consumption tax hike, certain items such as food are set at 8%. In some cases, fraudulent activities occur where items subject to a 10% consumption tax are incorrectly recorded as 8% to gain profit.
The introduction of the invoice (qualified invoice) system provides the benefit of significantly reducing fraud, as the consumption tax amount is clearly stated for each transaction item.
For business entities, a reduction in fraud by suppliers may potentially lower their own tax burden.
Operational Efficiency
The introduction of the invoice system promotes the digitalization of transactions with partner companies, eliminating the need for traditional invoice printing and mailing tasks, which significantly improves operational efficiency.
Difficulty in Accurately Identifying Registration Numbers
Regarding invoice registration numbers, while a list of qualified invoice issuers is published, there are inconsistencies in the notation of names and addresses. Consequently, it is necessary to devise a method to reconcile these inconsistencies when linking published information with your own customer data, and such efforts are extremely difficult. If this ultimately requires manual verification, the workload becomes enormous.
It is particularly difficult to accurately identify registration numbers when a single corporation holds multiple registration numbers or when registration numbers are held at the office level.
If your company has many transactions with small and medium-sized enterprises or at the office level, introducing tools or services specialized in data maintenance may be a realistic solution.
Transitional Measures for the Invoice System
Although the Invoice System was implemented on October 1, 2023, transitional measures exist that allow tax-exempt businesses to defer becoming qualified invoice issuers.
Six-Year Transitional Period
There is a six-year transitional period, meaning businesses were not required to become qualified invoice issuers by October 1, 2023.
- October 1, 2023 to September 30, 2026: 80% deduction rate
- October 1, 2026 to September 30, 2029: 50% deduction rate
As noted above, an 80% deduction is allowed for the first three years, followed by a 50% deduction for the subsequent three years. These transitional measures allow businesses to consider whether to become taxable entities until September 30, 2029.
In other words, tax-exempt businesses do not need to rush to become qualified invoice issuers by October 1, 2023, and can evaluate their status during this period.
Procurement managers should verify the registration numbers of their business partners within this timeframe.
Withdrawal of Invoice Issuer Registration
Qualified invoice issuers can revoke their registration effective from the first day of a taxable period by submitting a "Notification of Revocation of Registration" to the tax office.
This means that even if a tax-exempt business registers as an invoice issuer, they can subsequently cancel that registration.
However, after October 1, 2023, the earliest period for which a cancellation can take effect is the following year (or the following fiscal year for corporations). Additionally, there are regulatory requirements, such as submitting the notification at least 30 days in advance.
For procurement managers, it may be prudent to re-verify the invoice registration status of suppliers shortly before October 1, even if they have been checked previously.
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