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Abstract

Now in its second decade, Japan’s consumption tax remains unpopular and controversial at home while hailed internationally for its functional structure.(1) The tax is fundamentally a value-added tax levied on the domestic sale or lease of goods or services. Exports are tax-free while imports are taxed when they enter the country. Although the tax base has narrowed since its adoption, through the expansion of the exemptions, it remains a broad-based tax, levied at a single rate of 5%.

Small businesses are exempt from the tax. Those businesses that pay and collect the tax may use a simplified accounting structure to calculate input credits and thereby arrive at the amount of tax to be paid.

The single low rate and the simplified accounting structure are features designed to promote equity and efficiency. They have not, however, improved the domestic acceptability of the tax.

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