Government proposes 1% consumption tax cut with revenue-proportional subsidies for farmers; temporary exemption from total-price display also under consideration

The Japanese government on the 25th began coordinating subsidy payments for small and mid-sized farmers expected to see revenue declines, based on its policy of reducing the consumption tax rate on food and beverages from 8% to 1% for a two-year period starting April 2027. The plan envisions a mechanism to fill the revenue shortfall in proportion to sales, aiming to soften the blow to business operations. Details of the program and subsidy amounts will be fleshed out during the formulation of the FY2027 initial budget and finalized by the end of 2026.

The government presented an outline of the support measures to the Liberal Democratic Party on the same day. The goal is to alleviate concerns among businesses affected by the tax cut and ensure a smooth transition when the reduction takes effect in April 2027.

Small-scale operators account for the majority of the agriculture and fisheries industries. Under the current system, businesses are exempt from paying all or part of the consumption tax collected at the point of sale, allowing them to retain it as income. Businesses with annual sales of ¥10 million or less are fully exempt as “tax-exempt businesses,” while those with sales of ¥50 million or less receive partial exemption as “simplified taxation businesses.” However, after the tax cut, the tax-equivalent amount received from agricultural product sales will decrease by 7 percentage points, while farmers will still need to pay 10% consumption tax on purchases of farm machinery and fertilizer, reducing their net income. The government plans to pay subsidies according to business category, under the rationale of offsetting this tax burden on inputs.

The Liberal Democratic Party’s Tax Research Commission held an executive meeting at party headquarters on the same day, beginning detailed design work on the food and beverage consumption tax reduction. The meeting included discussion of rules for displaying tax-exclusive and tax-inclusive prices separately after the tax cut, as well as the treatment of tax-exempt businesses.

Temporary exemption from total-price display under consideration

Concerns have been raised that retailers may not be able to complete the relabeling of price tags in time. As a result, a proposal has emerged to establish a special measure temporarily exempting the “total-price display” requirement, which mandates showing tax-inclusive prices. Coordination is moving toward allowing display of tax-exclusive prices only. The total-price display requirement has been legally mandated since April 2021, but the aim is to reduce the burden on retailers specifically around the period of the tax cut.

Also raised as items for consideration were the applicable tax rate for cases where a tax cut takes effect between contract signing and product delivery, such as in mail-order sales, and the tax-law treatment of income-linked benefits. It was confirmed that the 8% tax rate will be maintained for subscription newspapers, which are subject to the same reduced tax rate as food and beverages.

Support for the restaurant industry is also being explored. While the tax rate on boxed lunches and prepared foods will drop from 8% to 1%, dine-in restaurant meals will remain at 10%, potentially making them feel relatively more expensive and reducing customer traffic. Support measures are therefore being sought for labor-saving initiatives such as self-checkout registers and the introduction of takeout services, which would be subject to the 1% rate.

Government outline targeted for mid-September; revenue sources deferred to year-end

The government approved the basic policy for the tax cut at a cabinet meeting on August 5. Starting next April, the consumption tax rate on food and beverages will be reduced from 8% to 1% for two years, with approximately ¥600 billion (approximately $3.8 billion) in annual tax revenue equivalent to 1 percentage point redirected to cash benefits, aiming for an “effectively zero” rate. A new income-linked benefit system will be fully introduced starting in FY2029, after the tax cut ends.

The LDP is rushing to formulate the ruling coalition’s Tax Reform Outline together with its coalition partner, the Japan Restoration Party. Itsunori Onodera, chairman of the Tax Research Commission, told reporters after the meeting, “We want to proceed so that the government outline can be approved by the cabinet by mid-September.” The government aims to submit related legislation during an extraordinary Diet session in the autumn.

Measures to secure alternative revenue sources totaling approximately ¥10 trillion (approximately $62.8 billion) over two years for both national and local governments are expected to be deferred to year-end for specifics, with details to be finalized during the FY2027 initial budget formulation process. Securing the ¥5 trillion (approximately $31.4 billion) in annual funding needed for the tax cut and benefits, as well as support measures for small-scale farmers and the restaurant industry affected by the tax reduction, will also be discussed in detail during the budget formulation process toward year-end.