Japan announces tax cuts to bolster public spending

Japan's ruling coalition yesterday adopted tax reform policies for the next year aimed at boosting household spending and encouraging business investment to spur economic growth.

The highlights of the new policies include corporate tax cuts to increase the profitability of business house and expansion of tax breaks to wealthy Japanese to promote asset transfer from the elderly to the younger generation.

Some economists believe that the reforms framed by prime minister Shinzo Abe's Liberal Democratic party and coalition partner Komeito does not include urgent measures to support lower income groups and smaller companies struggling with rising prices and weaker currency.

The Japanese yen has weakened over 14 per cent against the US dollar in the past one year, which is now traded at around 120 yen.

The world's third-largest economy, after the US and China, contracted for the second straight quarter through September signaling a technical recession, following a 3-per cent increase in sales tax to 8 per cent from the beginning of April.

The economy shrank 1.6 per cent in the third quarter, after registering a 7.3-per cent contraction in the second quarter.

Subsequently, Abe announced an 18-month delay in the second sales tax hike to 10 per cent, which was planned for next October.

The Abe administration earlier promised to reduce the country's relatively high corporate tax to below 30 per cent over the next several years.

The tax reforms envisage slashing corporate tax by 3.29 per cent in the coming two fiscal years. The current 34.62-per cent tax rate will be slashed to 32.11 per cent in the first year beginning 1 April 2015, which will be further reduced to 31.33 per cent in the next fiscal year.

Japan's corporate tax is higher than China's 25 per cent, South Korea's 24 per cent and Singapore's 17 per cent, according to the finance ministry.

To bolster public spending, it is planned to exempt from taxation gifts of up to ¥10 million from parents or grandparents to their offspring aged 20 years or more for the purpose of marriage, childbirth and child care during the next fiscal year.

Japan's ageing population is believed to own around 60 per cent of financial assets held by individuals and the new exemption is aimed at stimulating economic growth through increased consumer spending.

The existing exemptions on capital transfer tax for people donating funds for the education and home purchase of their children and grandchildren will continue.

According to some analysts, the new proposals are unlikely to help narrow the income gap between people benefiting from Abe's economic policies and those plagued by their side effects.

It is not clear how the administration is planning to compensate for the revenue loss due to tax shortfall, but it is believed that some corporate tax breaks will be reduced.

To revive growth in regional economies, the government will provide tax breaks to companies moving their headquarters to regional areas from Tokyo and other big cities.

Taxation of wealthy Japanese will be reinforced in order to prevent offshore tax evasion.

The ruling coalition has not clarified how the prices of daily necessities will be affected due to new reform policies. The two parties will begin discussions in the New Year about which items should be subject to reduced tax rate keeping in view the sales tax increase to 10 per cent in April 2017.

Meanwhile, the government is going ahead with its aggressive monetary easing plans. Last week, Abe's cabinet approved an additional $29-bn stimulus package aimed at pulling the country out of recession.

(See: Japan's Abe pushes $29 bn fresh stimulus to spur growth)