December 16, 2010 / 6:51 AM / 7 years ago

Japan govt approves tax plan, focus shifts to budget

TOKYO, Dec 16 (Reuters) - Japan’s government approved tax guidelines for the next fiscal year on Thursday that would lower the burden on companies and raise taxes on the wealthy to boost job creation and fund welfare programmes.

The guidelines pave the way for the government to focus on the budget for the fiscal year starting next April 1, but economists doubt the tax code changes will do much to achieve the government’s goal of ending deflation.

For fiscal 2011/12, Prime Minister Naoto Kan has repeatedly pledged to stick to a cap on new bond issuance of 44 trillion yen ($522.4 billion) and a spending target of 71 trillion yen, excluding debt servicing costs. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ More stories on Japan tax policy [ID:nTAXJP] More stories on Japan’s economy [ID:nECONJP] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The government will need to show fiscal restraint in the budget it aims to compile by Dec. 24. Any wavering over spending cuts could cast doubt over Kan’s management as he struggles with low voter support and signs of revolt within his party.

The government did not provide estimates for next fiscal year’s tax revenue.

It is possible that tax revenues next fiscal year could be less than income from new bond sales, which would be the same as the current fiscal year, showing how difficult it is to restore the country’s public finances.

Passage of related bills is not guaranteed because the Democratic Party-led government needs the support of opposition lawmakers to pass them in a split parliament.

Following are highlights of the tax guidelines for 2011/2012:

— Lower the effective corporate tax rate of around 40 percent by 5 percentage points in an effort to increase firms’ competitiveness and discourage them from moving operations overseas. This will result in a 1.5 trillion yen loss in tax revenue.

— Expand the corporate tax base by tightening rules on depreciation and carrying financial losses over multiple fiscal years, which will save the government 650 billion yen.

It is still uncertain how the government will make up for the remaining revenue lost from the corporate tax cut.

— Lower the effective tax rate for small and medium-sized enterprises by 3 percentage points to 19 percent. Also expand temporary tax breaks for such firms by lowering their corporate tax rate to 15 percent from 18 percent.

— Extend for two years a tax break that halves taxes on both stock dividends and stock capital gains to 10 percent, since the economy is in deflation and households hold a large volume of shares.

The tax breaks have been in place since 2003 and were set to expire at the end of next year.

— Allow firms that increase payrolls over a certain amount to deduct as much as 10 percent from their tax bill to encourage job creation. For smaller firms it would be up to 20 percent.

— Effectively raise taxes for the wealthy by capping personal income tax exemptions. Scrap exemptions for families with adult dependants, excluding the elderly and those with disabilities, to fund other welfare programmes. This would eventually raise tax revenues by 500 billion yen.

— The guidelines say the 5 percent sales tax is important in order to pay for rising welfare costs and the government will work with opposition parties to compile by the middle of next year a comprehensive reform plan. This is a coded reference to a sales tax hike. The tax plan also says the government would consider earmarking sales tax revenues for welfare spending.

— Levy a new tax on CO2 emissions from fossil fuels from Oct. 1 next year. Taxes on primary fuel consumers such as power utilities will rise gradually and then full tax rates will become effective in April 2015, generating around 240 billion yen in revenue.

The tax is aimed at curbing use of high-carbon fuels to meet the government’s goal of cutting CO2 emissions by 30 percent by 2030 compared with 1990 levels. The tax rate in April 2015 will be 760 yen per kilolitre of crude (about 121 yen per barrel), 780 yen per tonne of liquefied natural gas and 670 yen per tonne of coal.

For consumers, gasoline prices will likely rise by 0.76 yen per litre (3 cents per gallon) from 132 yen per litre on average currently. Power bills for households in Tokyo will likely rise by about 30 yen from the current average of 6,222 yen per month.

The government will offer tax breaks for jet fuel and extend a grace period to thermal coal for caustic soda makers and fuel for low-carbon transport such as railways. ($1=84.23 Yen) (Additional reporting by Risa Maeda; Editing by Michael Watson and Edmund Klamann)

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