A farmer grows sweet potatoes and, for three winter months, dries them into hoshi-imo — Japan's traditional dried sweet potato — in a building on his property. Under the simplified consumption tax scheme he filed as "agriculture" (Category 2, 80% deemed input ratio). The tax office answered: this is "manufacturing" (Category 3, 70%) — reassessment plus penalties. The National Tax Tribunal agreed with the tax office. The decisive facts: a work shed on the premises and a few seasonal workers hired only for the winter. This instalment reads a ruling that matters to every farm moving into processing — and to anyone on the simplified scheme.
The case: a sweet-potato farm's winter side
The farmer grows sweet potatoes, rice and feed rice. From late November to late February, part of the sweet-potato harvest is washed, steamed, peeled, sliced in a building on his home lot, then dried for about a week in greenhouses and shipped to wholesalers.
Having elected the simplified consumption tax scheme, he filed the hoshi-imo sales as "agriculture — sales of food products", Category 2 (80% deemed input ratio).
The tax office reassessed three years at Category 3 (manufacturing, 70%) with under-reporting penalties. The farmer argued the building was a multi-purpose shed used only seasonally and the winter workers were not "regular employees". The Tribunal dismissed the appeal.
What the 10-point gap means
Under the simplified scheme (available below ¥50m in base-period taxable sales), input tax is computed as sales tax × a deemed input ratio by business category: 90% wholesale, 80% retail and agriculture/forestry/fishery selling food products, 70% manufacturing and construction, 60% restaurants, 50% services, 40% real estate.
Farm sales of food entered Category 2 only in October 2019, when the reduced 8% rate arrived — that change is exactly why the farmer claimed Category 2. Selling the potatoes raw would undoubtedly qualify. On ¥10 million of hoshi-imo sales (8% reduced rate → ¥800k output tax), Category 2 means paying ¥160k, Category 3 ¥240k: ¥80k a year, ¥240k over the three reassessed years, plus penalties and interest.
The yardstick: the Japan Standard Industrial Classification
Whether something is "manufacturing" is judged, per NTA circular and now this ruling, by the major divisions of the government's industrial classification. For farms it says:
Processing your own harvest
Processing mainly self-grown produce remains agriculture. (Processing bought-in produce is manufacturing from the start.)
A workshop + dedicated regular workers
If there is something recognisable as a factory or workshop on the same premises, with regular employees dedicated to the processing, it is manufacturing.
The farmer lost on both limbs. The building had a built-in boiler and electric winch and was used exclusively for processing during the three months — a "workshop", the multi-purpose argument dismissed as his own theory. The seasonal workers were hired for the processing period and did nothing but processing work — "dedicated regular employees" for that period; three months' brevity did not matter.
What to take away
The same yardstick reaches rice farmers making mochi or miso, orchards making jam and juice — essentially all "sixth-sector" farm processing.
| Common belief | Reality |
|---|---|
| "Processing my own crops is an extension of farming" | True as a rule — until a processing building plus dedicated workers appear; then it becomes manufacturing |
| "Winter-only casual staff aren't regular employees" | This ruling held about three months of seasonal hiring sufficient |
| "Category, once set, stays" | It follows the facts. New equipment or new hires can change it that year |
| "A category error is minor" | 10 points ≈ ¥80k/year on ¥10m of reduced-rate sales — reassessed several years at once, with penalties |
One more practical point: with multiple businesses, failing to book sales separately by category means the lowest deemed input ratio applies to everything. A farm selling both raw produce (Cat. 2) and processed goods (Cat. 3) protects its 80% only by split bookkeeping.
FAQ
Q. Can a category decision be contested?
A. Yes, within three months. But categories follow the objective industrial classification, so personal interpretations rarely prevail — advance confirmation is the safe path.
Summary
- A business that processes home-grown sweet potatoes into dried sweet potato (hoshi-imo) and sells them was ruled to be manufacturing (Category 3, 70% deemed purchase rate), not agriculture (Category 2, 80%) (ruling dated September 8, Reiwa 7 / 2025).
- The yardstick is the Japan Standard Industrial Classification. Having both an on-site workshop and regular employees dedicated to processing makes it manufacturing.
- Even seasonal employment of about three months was recognized as a "regular employee dedicated to the work." Treating it as "just temporary" did not hold up.
- If sales are 10 million yen excluding tax, the difference is 80,000 yen a year, or 240,000 yen over three years — on top of which underreporting penalties and late-payment interest are added.
- If sales are not recorded separately by business category, the lowest deemed purchase rate applies to the entire amount.
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Sources
The case is a ruling anonymised and published by the National Tax Tribunal. Rulings are outside copyright under Article 13(iii) of the Copyright Act; the Tribunal's site follows the Public Data License (v1.0).