- Transition relief under the invoice system — what it means
- The transition relief under Japan’s invoice system is a time-limited mechanism that lets a client claim an input tax credit for a set portion of the consumption tax equivalent even on purchases from parties who cannot issue a qualified invoice, such as tax-exempt businesses. It is 80% until the end of September 2026, then shrinks in stages to 70%, 50% and 30%, ending in October 2031.
I got into a dispute over Japan’s invoice system. Here is what happened.
I got into a dispute with a client over the invoice system. It is resolved now, so let me share what happened.
What the dispute was about
- A tax-exempt business cannot charge consumption tax
- Consumption tax must not be shown on the invoiceIn conclusion, the above is apparently the case.
But acting on the opinion of a tax accountant, it was resolved. Here is that experience in chronological order.
As a tax-exempt business, I was worn down considerably by the invoice system. To stop trouble happening again, let me share the basic knowledge and the conversations involved. I will write this so that a tax-exempt business only has to remember what is in this article to avoid losing out.
✓ What this article covers
- The knowledge you need to avoid losing out under the invoice system
- A way for the exempt business and the client to both avoid losing out
- How a tax-exempt business avoids disputes over the invoice system: a template
Note: this article is a first-hand account from November 2023. The schedule for the transition relief has since changed under a tax reform, so I have added the latest information as of July 2026 in the second half of the article.
The knowledge a tax-exempt business needs to avoid losing out under the invoice system
Here is what a tax-exempt business needs to know, explained without jargon. What follows is written from the point of view of a transaction between an invoice-registered business (the client) and a tax-exempt business (the supplier). The conclusion is these three lines.
- Charge the 10% consumption tax as it is → the client loses out
- Discount the whole 10% consumption tax → the tax-exempt business loses out
- Discount only 20% of the 10% → neither loses out (there is a calculator; during the period of 80% transition relief)
Let me explain why, with two patterns.
Pattern 1: charging the 10% consumption tax as it is → the client loses out
Why the client loses out
Under the invoice system, the client can no longer deduct the consumption tax on payments with no qualified invoice through the input tax credit. A tax-exempt business cannot issue a qualified invoice, so the 10% consumption tax the client pays a tax-exempt business is treated, for tax purposes, not as consumption tax but as part of the price of the goods.
The way I picture it is as follows.
- Before the invoice system: price plus tax. The client could deduct the tax later, so there was no real burden
- After the invoice system: price plus tax. It cannot be deducted, so the tax lands directly on the client (with 80% deductible under the transition relief)
In other words, if you pay the full 10% consumption tax in a transaction with a tax-exempt business, the client ends up paying consumption tax twice, once to the exempt business and once to the state. The client loses out by the amount that cannot be deducted.
Pattern 2: discounting the whole 10% consumption tax → the tax-exempt business loses out
Why the tax-exempt business loses out and the client gains
Conversely, if you discount the whole 10% consumption tax, this time only the tax-exempt business loses out. The reason is the transition relief on the input tax credit. There is no need to memorize the terminology. Let me build a concrete example with a price of ¥10,000.
- Goods priced at ¥10,000
- Discount the 10% tax: the invoice is ¥10,000 (this amount effectively becomes tax-inclusive)
- Of that tax-inclusive ¥10,000, the consumption tax is ¥909. The client can deduct 80% of that, ¥727 (the transition relief)
- The client’s real burden: ¥9,273
So even though the tax-exempt business supposedly discounted the tax portion, the strange thing happens that the client can deduct consumption tax on top. One tax accountancy firm’s article puts it as follows.
We are not paying consumption tax to tax-exempt businesses!!
The period in which the transition relief can be applied is six years in total. For the first three years (October 1, 2023 to September 30, 2026) it is 80% of the equivalent input tax amount, and for the three years after that (October 1, 2026 to September 30, 2029) it is set at 50%.Client Company A can deduct from the other consumption tax it has collected the sum of ¥36,363 — that is, the ¥45,454 consumption-tax equivalent obtained by multiplying the ¥500,000 monthly retainer paid to Yokohama Tax Corporation by 10/110 (the consumption tax rate, local consumption tax included), multiplied by 80%. (Supplementary Provisions of the Consumption Tax Act, Articles 22(1) and 23(1).)
Hang on — what is this? Even though the monthly retainer was set at ¥500,000, for Company A the retainer paid is ¥463,637 and the deemed input consumption tax is ¥36,363. It has somehow turned into a discount…?
Note: the periods and percentages in the quotation are the schedule as it stood at the time of writing. They changed in the 2026 tax reform (explained in the postscript in the second half of this article).
So discounting the 10% lowers the client’s burden, and the tax-exempt business loses out.
Leaving aside whether “losing out” and “gaining” are the right words, the presence or absence of the 10% consumption tax means one side or the other carries the burden. So let us look at the middle path where neither side loses out.
Pattern 3: the way neither the tax-exempt business nor the client loses out
In the two patterns above one side or the other carried the burden, but while the transition relief lasts you can adjust so that neither side loses out. The method is simple: the tax-exempt business discounts only the part of the 10% consumption tax that the client cannot deduct. During the 80% relief period, that is a discount of 20% of the 10%.
Try the tool below. We have built a calculator on this site that reflects the 2026 tax reform (70% deduction).
Invoice transition relief calculator (free, updated for the 2026 reform) (Japanese)
Reference: an external discount calculator (as of July 2026 it still uses the pre-reform schedule)
Enter the transaction amount and the tool works out the discounted figure at which “the client’s burden is the same whether they deal with a tax-exempt business or an invoice-registered one.” The rough picture is as follows.
- Discount only the surplus amount that cannot be deducted when ordering from a tax-exempt business
- The client’s real burden becomes the same as in a transaction with an invoice-registered business
The tool above does that slightly complicated calculation in one go. I use it to show clients that “your burden is the same as with an invoice-registered business.”
I said neither side loses out, but in reality a tax-exempt business earns less than before the invoice system. For now the burden is 20% of the 10% consumption tax, but it grows each time the relief shrinks, and once it ends the burden is the whole 10% (that is, a 10% discount becomes mandatory). So once the transition relief ends, invoice registration becomes effectively compulsory, and because the tax is too high and the whole thing is a nuisance, I am going to set up a company overseas before that happens.
(2026 update: the plan for a company overseas is from the time of writing. I have since moved my base to Sendai and run Webharu Inc., doing web production and AI development.)
If a company overseas or the nomad life interests you, come to the newsletter. I publish everything about how the business develops there.
The transition relief changes what you should do from here
Put simply, the transition relief is a mechanism under which part of the consumption tax can still be deducted even when you order from a tax-exempt business.
Example: 10% of ¥10,000 is ¥1,000. During the 80% deduction period, the client can deduct 80% of that ¥1,000, or ¥800.
At the time of writing (2023) the schedule was set to be “80% until the end of September 2026 → 50% until the end of September 2029 → ends.” That plan changed in the 2026 tax reform. See the next postscript for the current position.
[July 2026 update] The transition relief has changed to a two-year extension with finer stages
About three years have passed since I wrote this article and the situation has moved, so here is an update (as of July 2026, based on information published by the National Tax Agency and on explanations from tax accountancy firms).
- The 80% deduction runs until September 30, 2026 as planned. At the time of this postscript, about two and a half months remain
- From October 1, 2026 it was to halve to 50%, but the fiscal 2026 tax reform eased that to 70%
- The new schedule: 80% (to September 2026) → 70% (to September 2028) → 50% (to September 2030) → 30% (to September 2031) → ends (from October 2031). That is two years longer than originally planned
- However, the portion of purchases from the same tax-exempt business exceeding ¥100 million a year is excluded from the transition relief (from October 2026). That is an amount ordinary freelance work will never come close to
The size of the “neither side loses out” discount described in this article changes accordingly. From October 2026 the guide becomes a discount of 30% of the 10%, rather than 20% of the 10% (because the portion the client cannot deduct rises to 30%).
To go with that, we have published a calculator on this site that reflects the 2026 reform schedule. Enter the tax-inclusive amount and it works out the deduction, the increase in burden, and the discount at which neither side loses out. → Invoice transition relief calculator (free) (Japanese)
Also, the “20% special measure” for people who switched from tax-exempt status to invoice registration (paying only 20% of the consumption tax on sales) runs, for sole proprietors, until the 2026 tax year. In its place a “30% special measure” has been created for the 2027 and 2028 tax years. If you are unsure whether to register, that is another factor to weigh.
How a tax-exempt business avoids disputes over the invoice system: a template
The message I send every time is as follows.
- Please use this invoice. It has been prepared under the supervision of a tax accountant so that no burden arises beyond the contracted amount. The wording “consumption tax” has been changed to “technical fee,” but the total amount and the deductible amount are unchanged; the change is only there to keep things consistent. The calculation uses the tool below, and the price has been discounted and adjusted so that your burden is no different from a transaction with an invoice-registered business. > https://www.webharu.com/tools/invoice-calculator
The above is wording I put together on my tax accountant’s instruction. Adjust the fine details and phrasing to your own tone. About one sentence in it.
- The wording “consumption tax” has been changed to “technical fee,” but the total amount and the deductible amount are unchanged; the change is only there to keep things consistent.
Some objections to this part came up on Twitter. The reasons were along the lines of “consumption tax can be charged” and “it is better to state the 8% and 10% tax categories explicitly.” I broadly agree with those myself. But the tax accountant on the other side of this transaction said the method above was the right one, so I went along with it.
For the record, the view that “it is better to state the 8% and 10% tax categories explicitly” is entirely correct. The reason is that stating the tax category is among the conditions for applying the transition relief. But if you do not state the tax at all in the first place, the relief applies regardless. That is what the conversion to “technical fee” is for.
What I also learned from the responses on Twitter is that interpretations of the invoice system differ from one tax accountant to another. Our position is to wait and see on invoice registration for a while. I plan to move the business overseas at some point. If that interests you, do sign up for the newsletter. I send it out from time to time.
(2026 update: the plan to move overseas above is from the time of writing. I later changed course and now run Webharu Inc., incorporated in Sendai.)
[August 2026 update] The 80% deduction period runs until September 30, 2026
The deduction rate under the invoice transition relief switches from 80% to 70% on October 1, 2026 (fiscal 2026 tax reform). The discount adjustment and the way to write invoices after the switch are covered in the article on the October 2026 switch from 80% to 70% (Japanese).
FAQ
Is a tax-exempt business unable to charge consumption tax?
Charging it is not itself prohibited. Without a qualified invoice, though, the client cannot claim the full input tax credit (only part of it under the transition relief), so charging the full 10% increases the client’s burden, which is where disputes start.
How long does the transition relief last? (as of July 2026)
The 80% deduction runs until September 30, 2026. From October 2026 the tax reform sets it at 70%, then 50% (to September 2030) and 30% (to September 2031), shrinking in stages and ending in October 2031.
How large should the discount be so that neither side loses out?
You discount only the part the client cannot deduct. While the 80% deduction applies that is 20% of the 10% consumption tax, and from October 2026 the guide becomes 30%. The calculator on this site (/tools/invoice-calculator) works it out automatically from the transaction amount.
Is it acceptable to label the consumption tax on the invoice as a technical fee?
It is a way of writing the invoice that follows the policy of this client’s tax accountant, and it exists to keep the total amount and the deductible amount unchanged. I broadly agree with the view that stating the tax category explicitly is better, so adjust the exact wording to your own tone.
Is there a special measure for a tax-exempt business that registers for the invoice system?
The “20% special measure” — paying only 20% of the consumption tax on sales — is available to sole proprietors until the 2026 tax year. In its place a “30% special measure” has been created for the 2027 and 2028 tax years, which is a factor to weigh if you are unsure whether to register.
