Taxable businesses that pay consumption tax have two ways to calculate the tax due: "general (standard) taxation (the principle method)" and "simplified taxation." Which one you choose can change the tax amount significantly, and whether it is advantageous or disadvantageous depends clearly on your line of business. In addition, the "20% special provision" for people who became taxable businesses because of the invoice system ends in September 2026, so deciding which method to choose afterward is also important. This article organizes the difference between the two calculation methods, the deemed purchase rate, how to choose, and the notification deadline.
The difference between the two calculation methods
A method that subtracts all the consumption tax on expenses you actually paid. Accurate bookkeeping, such as keeping invoices, is required.
Instead of calculating the consumption tax on expenses at the actual amount, it estimates it using a "deemed purchase rate" for each type of business. A business whose taxable sales in the base period (two years earlier) are ¥50 million or less can elect it by filing a notification in advance[National Tax Agency No.6505 (in Japanese)].
・Simplified taxation: ¥1 million − (¥1 million × 50%) = pay ¥500,000
・General taxation (if the consumption tax on expenses is actually ¥300,000): ¥1 million − ¥300,000 = pay ¥700,000
→ In this example, simplified taxation saves ¥200,000. Conversely, for a business where the consumption tax on expenses comes to ¥600,000, general taxation (¥400,000) is more advantageous. The relationship is that the more your actual taxable purchases fall below the deemed purchase rate, the more advantageous simplified taxation becomes.
Deemed purchase rate (business categories under simplified taxation)
| Business category | Main types of business | Deemed purchase rate |
|---|---|---|
| Category 1 | Wholesale | 90% |
| Category 2 | Retail, agriculture/forestry/fishery (food and drink) | 80% |
| Category 3 | Manufacturing, construction, agriculture/forestry/fishery | 70% |
| Category 4 | Restaurants, etc. (businesses not classified elsewhere) | 60% |
| Category 5 | Services, transport/communications, finance/insurance | 50% |
| Category 6 | Real estate | 40% |
* The higher the deemed purchase rate (i.e., the larger the proportion you can subtract), the smaller the tax amount[National Tax Agency No.6509 (in Japanese)].
Which is more advantageous? (a simple rule of thumb)
Simplified taxation tends to be advantageous
- Types of business with few expenses (taxable purchases), such as service businesses
- Your actual purchase ratio is lower than the deemed purchase rate
- You want to keep the effort of bookkeeping down
General taxation tends to be advantageous
- A year with capital investment or large purchases
- You are in the red, or a consumption tax refund is expected
- Your actual purchase ratio is higher than the deemed purchase rate
Because simplified taxation estimates the amount starting from the "consumption tax on sales," no consumption tax refund arises even if you make a large capital investment. In a year when you plan a high-value investment, general taxation may be more advantageous.
The invoice "20% special provision" ends in September 2026
People who went from being tax-exempt businesses to taxable businesses because of the invoice system can, for the time being, use the 20% special provision (tax due = consumption tax on sales × 20%). However, this special provision ends with the taxable period that includes September 30, 2026 (Reiwa 8)[National Tax Agency, the 20% special provision (in Japanese)].
From October 2026 you will choose either general taxation or simplified taxation. Sole proprietors, however, get a landing step called the "30% special provision." It is not a proposal under discussion: it was created by the FY2026 tax reform and is already enacted and in force[National Tax Agency Invoice Q&A No.114-2 (in Japanese)].
The 30% special provision covers the 2027 and 2028 tax years of sole proprietors and sets the tax payable at 30% of the tax on sales. No notification is needed; you simply add a note on your final tax return[National Tax Agency Invoice Q&A No.114-2 (in Japanese)]. Corporations are excluded[Ministry of Finance, outline of the FY2026 tax reform (in Japanese)].
How to choose after it ends is covered in How long does the invoice 20% special provision last?. For the invoice system as a whole, see The invoice system and tax-exempt businesses.
Watch the notification deadline (users of the 20% provision get a special rule)
To elect or stop simplified taxation you submit the "Notification of Election (Non-application) of the Simplified Consumption Tax System." The general rule is the day before the taxable period you want it to apply begins (for a sole proprietor, December 31 of the previous year)[National Tax Agency No.6505 (in Japanese)]. You cannot switch back to general taxation partway through the year. Simplified taxation also requires continued application for two years[National Tax Agency Invoice Q&A No.117-3 (in Japanese)].
There is, however, a special deadline for people who used the 20% or 30% special provision. If you move to simplified taxation from the following taxable period, filing by that period's final tax return deadline is in time[National Tax Agency Invoice Q&A No.117 (in Japanese)]. The FY2026 tax reform relaxed it from "during the following taxable period."
In other words, you can decide after a full year of sales and expenses is known. For an individual starting simplified taxation in the 2027 tax year, the deadline is March 31, 2028. Deadlines by fiscal year-end, and how they interact with the two-year rule, are covered in How long does the invoice 20% special provision last?.
FAQ
Which is more advantageous, simplified or general taxation?
Types of business with few expenses (taxable purchases) tend to find simplified taxation advantageous, while a year with capital investment or large purchases tends to favor general taxation. Compare the deemed purchase rate with your actual purchase ratio and run the numbers.
What are the conditions for choosing simplified taxation?
The conditions are that your taxable sales in the base period (two years earlier) are ¥50 million or less, and that you have submitted the notification of election of the simplified taxation system in advance. Once elected, continued application for two years is required.
Until when can the 20% special provision be used?
The 20% special provision for people who became taxable businesses because of the invoice system ends with the taxable period that includes September 30, 2026 (Reiwa 8). Sole proprietors can then use the 30% special provision (30% of the tax on sales) for the 2027 and 2028 tax years. Corporations choose general or simplified taxation.
What is the notification deadline for someone who used the 20% special provision?
If you move to simplified taxation from the taxable period after using the 20% or 30% special provision, filing by that period's final tax return deadline is in time. For an individual starting in the 2027 tax year, that is March 31, 2028. It is later than the general rule (the day before the first day), so you can decide after the year ends.
What is the deemed purchase rate when you have multiple types of business?
You divide sales by business category and calculate a weighted average of each deemed purchase rate. For sales that cannot be divided by category, the lowest deemed purchase rate applies.
Summary
Reference links (sources)
This article is based on the following materials published by the National Tax Agency and the Ministry of Finance (neutral, primary sources). Because systems and special provisions are revised, please check the latest content before filing.
- National Tax Agency No.6505 The simplified taxation system (in Japanese)
- National Tax Agency No.6509 Business categories under the simplified taxation system (in Japanese)
- National Tax Agency Overview of the 20% special provision (burden-easing measure for small-scale businesses) (in Japanese)
- National Tax Agency Invoice Q&A No.114-2 (the 30% special provision) (in Japanese)
- National Tax Agency Invoice Q&A No.117 (choosing simplified taxation after the 20% or 30% provision) (in Japanese)
- National Tax Agency Invoice Q&A No.117-3 (the 30% provision vs. simplified taxation; the two-year rule) (in Japanese)
- Ministry of Finance Outline of the FY2026 tax reform (in Japanese)
* This article is general information, not tax advice. For individual decisions, please confirm with a tax office or a tax accountant.
