Japan's VAT and Its Aftermath

Abstract

In Japan, the value added tax (VAT) was finally introduced in the tax structure in April, 1989, after long-standing trial and error by the government. The government has flirted with VAT since the late 1970s to stress the important role that the VAT could play in the tax system. Whenever attempts were frustrated to adopt VAT, different names were applied so as to diffuse political tension : i,e., the general consumption tax in 1979, the sales ta~~ in 1987 and the consumption tax in 1989. Towards the latter half of the 1980s, the frst and the second sweeping tax reforms were proposed in succession and carried out by the initiatives of Nakasone and Takeshita Cabinets, respectively. Needless to say, the main reason for pursuing these reforms was to solve unsettled issues with the introduction of VAT. Japan's VAT, named the consumption tax, came into existence in the second round of sweeping tax reform along with the worldwide movement to adopt VAT. The major aim of this article is to clarify a whole picture of Japan's VAT before and after its introduction. The paper is divided into six sections. Sections I and 11 are devoted to preliminary discussion in the key trend of VAT in the world and historical backgrounds of Japan's VAT. Section 111 deals with the main features of a new VAT in detail with relevant problems, followed by Section IV in which economic aspects and administrative consequences of VAT are discussed. Finally, recent amendments and further reform to improve VAT are summarized in Section V.