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CORRECTED: 3RD LD: Gov't endorses plan to raise sales tax in FY 2011+
[December 24, 2008]

CORRECTED: 3RD LD: Gov't endorses plan to raise sales tax in FY 2011+


(Japan Economic Newswire Via Acquire Media NewsEdge) TOKYO, Dec. 24_(Kyodo) _ The government endorsed Wednesday a medium-term tax reform program specifying fiscal 2011 as the year for raising the nation's consumption tax to cover ballooning social security costs, provided that the economy improves by that time.



The scheme was finalized after twists and turns as the New Komeito party, the Liberal Democratic Party's coalition partner, had revolted against Prime Minister Taro Aso's instruction to clearly state the consumption tax hike in three years for fear of losing votes in the upcoming general election. The premier has pledged to revive the economy in three years and then raise the tax.

To lay the groundwork for increasing the sales tax from the current 5 percent, the government will include a road map for the future tax hike in a supplementary provision to a fiscal 2009 tax reform bill, which will be submitted to the Diet in January.


"This plan to increase tax is aimed at enhancing security in our social security system and pension payments as well as medical and nursing care services," Aso told a press conference.

"The use of revenues from the additional consumption tax hike will be focused on areas of social security," the premier said. The planned tax boost is a burden the people must bear to maintain the nation's welfare system in the medium term, he added.

But Aso declined to state by how much the government will raise the sales tax, saying, "It is a matter that the government and the ruling parties will determine from now."

Economic and Fiscal Policy Minister Kaoru Yosano hailed the Cabinet's approval of the tax reform program following a formal agreement earlier in the day between the LDP and New Komeito.

"It is a landmark event" in which the LDP and New Komeito agreed on the principle that the sales tax should be raised in three years, Yosano said.

Yosano said on a television program Sunday that the government should raise the sales tax in stages to 10 percent.

On Tuesday, the New Komeito party accepted the tax reform program's reference to fiscal 2011 for the sales tax hike on condition that the program emphasize that the tax will only be raised if the economy improves within three years.

The approved program states that when implementing tax reforms, the government will "judge whether Japan is expected to achieve its potential growth rate" estimated to be above 1.5 percent and will "flexibly respond to unexpected changes in economic conditions."

Aso indicated at the news conference that the sales tax should be raised when the nation's economy is expanding, before reaching its peak, because a tax increase at the peak of expansion could aggravate the subsequent downward trend.

The government's tax reform program says, "A necessary legislative step should be taken in advance so that fundamental tax reforms, including the sales tax hike, can be implemented gradually from fiscal 2011 to the mid-2010s to establish a sustainable fiscal structure" in rapidly aging Japan.

The comprehensive tax system overhaul involves the review of other tax items such as income tax, corporate tax, inheritance tax and regional tax, and the sales tax is defined as "a major revenue source" to cover social security costs.

The government's original plan had said a necessary legislative step would be taken in 2010 and the entire tax reform package should be implemented by fiscal 2015. But wording on the timing was blurred in consideration of the New Komeito's position.

Finance Minister Shoichi Nakagawa said at a press conference that although the target year of 2010 for a legal revision was deleted from the program, the government must implement necessary legislative measures at an early date to prepare for the future sales tax hike.

The New Komeito party had expressed reservations about specifying the timing of the tax hike, saying proposing a specific time frame is undesirable at a time when the economy is worsening.

Copyright ? 2008 Kyodo News International, Inc.

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