"You're tax-exempt, so knock off the consumption-tax portion." Careless phrases business operators should avoid

When incorporating a company, one matter that must always be considered is the treatment of consumption tax. If the conditions are met, the company will be a tax-exempt business for two years.

Tax-exempt businesses are exempt from the obligation to pay consumption tax. This means that they neither remit consumption tax to the government nor receive refunds of consumption tax they have overpaid.

“Because you are a tax-exempt business, consumption tax does not apply. Give us a break for that amount.” At first glance, this may seem rational. But it is a major misunderstanding.

Let me explain with a specific example. Suppose an item with a cost ratio of 60% is sold for ¥100.
For an ordinary taxable business,

Sales ¥100; consumption tax collected: ¥10 (10%)

Cost: ¥60; input consumption tax: ¥6 (10%)

That is what it looks like. On a cash-flow basis, the business receives ¥110, pays ¥66 for purchases, pays ¥6 in tax, and has +¥38.
However, if a tax-exempt business gives a break for the consumption-tax portion, it looks as follows.

Sales: ¥100

Cost: ¥66

In this case, on a cash-flow basis, the business receives ¥100, pays ¥66 for purchases, and has +¥34.

In other words, when a tax-exempt business discounts the consumption-tax portion, it loses an amount equivalent to part of the corresponding consumption tax compared with a taxable business.

In fact, when a comparatively large company makes a supplier discount the consumption-tax portion (does not allow it to be passed on), this is conduct called “bullying subcontractors.”

Reporting systems are in place (anonymous reporting is OK), so it would be better not to take on that risk unnecessarily.

Tax-exempt businesses are usually small companies in particular, so society will generally side with the tax-exempt business against unreasonable demands.

It would be better to discuss what percentage discount you would like from the viewpoint of economic rationality, unrelated to consumption tax.

Put simply, a “buyer that continuously deals with businesses with capital of ¥300 million or less” is considered a specified business operator, and is prohibited from making its subcontractors (sellers) reduce the consumption-tax portion, forcing down their prices, demanding services as compensation, and similar conduct.

The Small and Medium Enterprise Agency and the Japan Fair Trade Commission keep a close watch on this. They frequently ask companies to complete questionnaires and conduct investigations. If an investigation catches something and it is judged necessary, it will be made public. It seems that cases involving the conduct of large companies, which are generally the stronger party, are often publicized.

(Source: Japan Fair Trade Commission website, list of pass-through recommendations (Japanese))

I have written a variety of things, but please have both sellers and buyers keep just this in mind.

Neither sellers nor buyers should discount consumption tax at all.

This is the golden rule of transactions between business operators.

Transactions between business operators … BtoB

What about transactions between business operators and general consumers (BtoC)?

Various methods of displaying prices are permitted here, so my advice is:

choose, from among the permitted methods, the display method that sells best

That is the approach I recommend. I express it simply as “sells best,” but it is not just about selling quickly; the sincerity of the display and other factors will probably also be needed to acquire loyal customers over the medium to long term, so this is where management judgment comes into play.

(1) Displays stating that consumption tax has not been passed on to the other party to the transaction
a. “We will not pass on consumption tax.”
b. “We pass on consumption tax only for some products.”
c. “Because we do not pass on consumption tax, our prices are lower.”
d. “We do not charge consumption tax.”
e. “Our store bears the consumption tax.”
f. “We will give you a break on consumption tax.”
g. “Consumption tax is on the house.”
h. “Consumption-tax rebate,” “consumption-tax rebate sale”
i. “Our store is holding prices at the level before the consumption-tax increase.”
(2) Displays stating that consumption tax to be borne by the other party to the transaction will be deducted from the amount of consideration, and expressly indicating their connection with consumption tax
a. “We will discount the amount of the consumption-tax rate increase.”
b. “Consumption-tax 10% rebate sale”
c. “We will absorb the tax-increase portion.”
d. “We will discount the consumption-tax rate increase at the register.”
(3) Displays stating that an economic benefit will be provided to the other party to the transaction in connection with consumption tax, which are prescribed by a Cabinet Office Ordinance as equivalent to the displays listed in (2)
a. “We will award points equivalent to consumption tax that can be used for your next purchase.”
b. “We will provide gift certificates equivalent to consumption tax.”
c. “We will provide one product of your choice equivalent to consumption tax.”
d. “We will later refund the amount of the consumption-tax increase in cash.”

Have you ever used a pawnshop? I have not used one yet, but it appears that negotiations are generally conducted on a tax-inclusive basis.

If they say, “Hmm, we will buy this bag for ¥10,000,” a business operator would think of that as a ¥11,000 purchase, but because the counterparty is an individual, it is negotiated as ¥9,260 plus ¥740 in tax. It would be nice if there were more transparency.

Why not try negotiating once by asking, “Wouldn't it be a purchase for ¥11,000 including tax?” Unless the pawnshop is tax-exempt, even when it quotes ¥10,000, the purchase cost recorded in its books is, in principle, ¥9,260.
By being conscious of consumption tax in everyday life, individuals may also begin to see business differently. Leaving aside moral issues, I think some pawnshops have a shrewd business of buying cheaply without making people aware of consumption tax.