Tourist Consumption Tax Exemption Under Fire Over Abuse

With rising prices, public focus on potential consumption tax cuts is growing. Simultaneously, though, debate is also heating up around Japan's tax exemption system for inbound foreign tourists. The government insists that the exemption is essential to its goal of becoming a "tourism nation." However, lawmakers from both ruling and opposition parties argue that the system unfairly privileges foreign visitors.

On top of that, there has been frustration with the rampant resale of duty-free goods by foreigners abusing the system. Although set to transition to a refund-based model in November 2026, expectations for increased tax revenue have kept calls for its full abolishment alive.

Scrap Duty-Free

Liberal Democratic Party lawmaker Kenji Nakanishi called for an end to the duty-free system. Speaking at a Diet committee session on finance and taxation in December 2024, he stated, "The duty-free system should be scrapped." He argued that, given the weak yen and strong purchasing appetite among inbound tourists. Eliminating the tax exemption, he argued, would have little economic impact.

According to government data, foreign tourists in Japan made ¥1.59 trillion JPY (approximately $10.2 billion USD) in duty-free purchases in 2023. If the 10% consumption tax had been applied, it would have translated into about ¥160 billion ($1.03 billion) in additional tax revenue. Japan is expecting even more tourists in the coming years, especially with events like the ongoing 2025 Osaka Expo. As a result, duty-free purchases seem set to continue increasing.

Osaka Governor Hirofumi Yoshimura (leader of Nippon Ishin no Kai) echoed this sentiment during a press conference on April 21. "It only makes sense to ask wealthy foreign visitors to pay the same consumption tax as Japanese citizens," he stated.

Evasion and Abuse of the Current System

Fueling the abolition movement is the widespread abuse of the current system. Foreigners posing as tourists have been found purchasing large volumes of tax-free goods. Many then resell these items in their home countries, adding the tax amount to turn a profit.

The government compiles statistics on taxpayers and exemptions. According to those, between FY2022- 2023, customs detected only about 10% of departing passengers who purchased over ¥100,000 million (approximately $700,000 ).

Since customs checks at departure are voluntary, some travelers reportedly avoided inspection altogether by, for example, refusing to present their passports. Moreover, in over 90% of the cases that were detected, the travelers no longer had the duty-free goods in their possession. This made tax collection nearly impossible. As one government official noted, "Even if we impose taxes, they're almost never paid."

To combat this, the government has decided to implement a "refund-based system" starting November 2026. Under this model, visitors will pay the full price, including tax, and receive a refund at departure after customs confirmation. A source familiar with the tax system said, "This should effectively eliminate resale abuse."

No Tax Exemption in the US or UK

Still, calls for abolition persist — largely due to the appeal of increased tax revenue.

International tax principles hold that consumption taxes should be applied in the country where a product is consumed. That's why Japan doesn't tax exports. Since foreign tourists theoretically take their purchases abroad, these goods are considered de facto exports and currently qualify for exemption.

Prime Minister Shigeru Ishiba has defended the system. In a February 4 Diet session, he stated, "There are purchases that can only be made in Japan," underscoring the tourism value.

However, the United States has no value-added tax and offers no exemptions in most states. And the United Kingdom abolished its tax exemption for visitors after leaving the European Union in 2020.

Yuichiro Tamaki, head of the Democratic Party for the People, also called for revisiting the system on his YouTube channel this spring.

He cited examples like the US and UK and argued that Japan should redirect tax revenue toward areas that improve domestic prosperity. With the Upper House election approaching this summer, the issue is likely to remain on the political agenda.

Defying Global Norms

Kagawa University Professor (of Tax Law) Takashi Aoki points out that the global standard is to apply consumption taxes in the country where goods are actually consumed. In Japan, services like meals and lodging are taxed because they're used domestically, but goods taken abroad are exempt, in line with this principle. Eliminating the exemption as some have proposed, he warns, would place Japan at odds with international norms.

However, moving to a system that refunds taxes when goods are taken out of the country is in line with international norms. He offers the example of automakers purchasing parts in Japan for export vehicles: while they pay consumption tax at the time of purchase, the tax is refunded upon export since the final product is consumed overseas. Ending this refund system would disrupt trade and violate widely accepted global practices, something Japan cannot change unilaterally.

The same logic, Aoki explains, should apply to duty-free shopping by tourists. Although reselling goods under the guise of tourism is essentially tax evasion, the real issue lies in enforcement. "Cracking down on abuse is necessary," he says, "but scrapping the entire system just because some people exploit it is an overreaction. The priority should be stopping the fraud, not eliminating the exemption itself."

Shifting to a European Refund Model

According to the National Tax Agency, only items purchased within 90 days of departure will qualify for a tax refund. Duty-free stores will electronically transmit purchase records to the agency's management system. At departure, customs officials will verify whether the traveler is taking the goods out of the country. If confirmed, the tax will be refunded to the buyer via bank transfer or credit card.

The new system will also abolish the current ¥500,000 ($3,200) daily cap on tax-free consumables such as cosmetics and alcohol. For purchases exceeding ¥1 million (pre-tax), stores will be required to report product names and serial numbers. This measure aims to prevent fraud or product substitution.

Additionally, the distinction between consumables and general goods will be eliminated, streamlining procedures for retailers. However, concerns remain that increased customs inspections could cause congestion at airports. Authorities will need to ensure adequate preparations are in place before the system rolls out.

(Read the article in Japanese.)

Author: The Sankei Shimbun