Japan’s Consumption Tax Experiment : Operating a VAT Without Tax Invoice

Japan’s Consumption Tax (“CT”) is unique in that it is a credit-subtraction value added tax (VAT) which operates without a tax invoice, not operated by any other country. Despite its deviation from the standard, credit-invoice VAT, the VAT Revenue Ratio (“VRR”) of Japan’s CT has been consistently higher than the average among the OECD member countries. What are the structural factors that explain this performance? Does the Japanese experience mean that the tax invoice requirement is not necessarily a significant factor for the proper functioning of VAT?This paper evaluates the strengths and weaknesses of Japan’s CT which operated without a tax invoice for the past 30 years. It shares lessons to be learned from the Japanese experiment which may be meaningful for the rest of the world. It demonstrates how the unique structure emerged in its original form in 1989. It then examines how Japan’s CT works in practice, focusing on its structural features and its vulnerability to fraud. The Japanese CT succeeded in mixing a broad base with a single rate structure. Since 1997 the CT increasingly resembles an invoice-credit VAT, although significant differences remain. The paper discusses why Japan’s CT is in the process of degenerating into a traditional VAT by adopting multiple rates in October 2019, with an expected move towards requiring a tax invoice from October 2023. It concludes that the broad tax base combined with a single rate was key to the relative success of Japan’s CT, while the lack of tax invoices may not have been detrimental from an enforcement perspective