Japan is expected to benefit from a tax windfall

Despite demands from the International Monetary Fund to reduce spending and raise taxes in response to the COVID-19 pandemic in January 2022, the Japanese government today, July 4, reported a record estimate of ¥67 trillion ($496.2 billion) in revenue from fiscal year 2021–2022.

According to tax experts, this will probably encourage future budgets to spend more on incentives as well. They anticipate increased government spending on growth-stimulating measures like targeted tax breaks or patent box benefits.

With sales tax, corporate tax, and personal income tax bringing in the most money, this sets a record for the second year in a row. Based on information from Reuters, all tax revenue projections have been increased from the initial calculations.

According to Daiju Aoki, chief economist at UBS Sumi Trust Wealth Management in Japan, "this could mean the government is prioritising growth and growth-oriented investment," in another Reuters report.

In April, Japan unveiled its ¥107.6 trillion (2022) budget, and in May, the government even approved an additional ¥5.5 trillion trillion ($5.5 trillion) to protect Japan's rising prices from inflation.

The increase in revenue for fiscal year 2021 is attributed to a number of corporate tax factors, including the infamous "Kishida shock." As part of a fiscal consolidation effort, Prime Minister Fumio Kishida raised the 20% capital gains tax rate.

However, by imposing tougher financial and carbon levies in reforms included in the 2022 budget, the Japanese government has avoided expanding the tax base.

Masakazu Tokura, chairman of the board of directors at Sumitomo Chemical and head of the Japanese business association Kaidenren, stated in his quarterly report: "I think this must have been shelved this time due to the need to examine closely its impact on the real economy and the financial capital market."

After passing a reform bill in March 2022, the government is still on track to increase its corporate tax revenue collection in the ensuing years. These adjustments started in April and included adjustments to the group profit and loss sharing regime as well as a dividend withholding tax.

According to advisers, Japanese law permits spending half of the budget balance from the previous fiscal year on additional smaller budgets that may be created later this fiscal year. Since May 2022, one additional budget has already been approved.

Politicians may use fiscal measures to reduce inflation and aid in the economic recovery as a result of higher revenue. Due to Japan's aging population, an increase in social security spending accounts for about one-third of the budget.

Based on its efforts to balance the budget, the Japanese government is targeting economic growth with its policy-making rather than increasing debt on its balance sheets. Japan may become an even more desirable corporate tax environment as the COVID-19 pandemic's effects fade.

By fLEXI tEAM