A startup can be loss-making because of recruitment and development yet still owe consumption tax at year-end. Consumption tax is based on tax on sales and purchases, rather than a percentage of company profit. A payroll-heavy company and a company investing heavily in contractors or equipment may therefore face different payments or refunds despite identical losses.

1. Payroll generates no input tax credit, so losses can coexist with tax payments

Under the general method, deductible input tax is normally subtracted from output tax on sales. Employee salaries are not taxable purchases and generate no input tax credit. Contractor and staffing-agency fees, by contrast, can be taxable purchases depending on the transaction. NTA: Purchases eligible for input tax credits

Consider an illustrative company with ¥30 million of domestic taxable sales excluding tax, ¥25 million of payroll and ¥10 million of domestic taxable expenses eligible for full credit. Assume the standard 10% rate throughout, tax-exclusive accounting and no other profit or tax adjustments.

Approximation including national and local consumption taxes. Actual returns involve separate calculations, rounding, interim payments and other adjustments.

This does not mean employees should be replaced with contractors. Employment and contracting are classified according to their substance; labels cannot be freely chosen for consumption tax purposes. The practical point is to update the consumption tax forecast separately whenever payroll budgets increase.

2. Initial exemption depends on more than starting capital

A newly established corporation with no base period cannot use the exemption for a period if its capital or contributions at that period's beginning are ¥10 million or more. The boundary includes exactly ¥10 million. Below that amount, invoice registration, sales or other figures in the specified period, and the rules for specified newly established corporations can still create liability. NTA: Corporations without a base period

A company formed with ¥9 million can face a different result next year if a capital increase takes its opening capital to ¥10 million or more. Record not only total funds raised but the amount allocated to stated capital, the issue date and capital at each fiscal year's beginning. If pricing assumed exemption before registration or fundraising was decided, check whether tax can be passed through and whether existing prices are tax-inclusive or tax-exclusive.

An exempt business cannot obtain input tax refunds even if it paid amounts corresponding to consumption tax to suppliers. Large investment alone does not automatically produce a refund. NTA: Exempt businesses and input tax refunds

3. Compare general taxation, simplified taxation and the 20% special measure separately

The general method uses actual taxable purchases. Under simplified taxation, eligible businesses with base-period taxable sales of ¥50 million or less and the required election calculate credits using industry-specific deemed purchase ratios applied to output tax. Advance filing and minimum continuation rules normally apply; it is not an unrestricted annual choice after year-end. NTA: Simplified taxation

The 20% special measure allows eligible businesses becoming taxable through invoice registration to pay 20% of output tax. It covers tax periods containing a day between October 1, 2023 and September 30, 2026. Transactions after September 30, 2026 are not automatically excluded. Businesses already taxable because of base-period sales or other disqualifying conditions may be ineligible. NTA: Overview of the 20% special measure

A method attractive in a payroll-heavy year may be less attractive during major development or equipment investment. Even under the general method, taxable-sales ratios and other rules may limit credits. The basic conditions for full credit are taxable sales of ¥500 million or less and a taxable-sales ratio of at least 95%. NTA: Calculating input tax credits

4. The October 2026 transition is 70%, not 50%

Following the 2026 reform, transitional credits for taxable purchases from suppliers unable to issue qualified invoices are 70% from October 2026, 50% from October 2028, 30% from October 2030 and zero from October 2031. Older explanations saying 50% from October 2026 should not be used unchanged. The applicable annual or fiscal-year purchase cap per supplier has also been reduced to ¥100 million including tax for tax periods beginning on or after October 1, 2026. NTA: 2026 tax reform

For an eligible purchase of ¥1 million excluding tax plus a ¥100,000 tax-equivalent amount, a 70% credit is ¥70,000, assuming no other limitations. It is not 70% of the entire ¥1.1 million invoice. Check supplier registration and retain invoices and books showing that the transitional measure applies.

The 30% special measure introduced for 2027 and 2028 is for eligible individual businesses, not corporations. A corporate cash forecast must not automatically replace the 20% measure with 30%. NTA: Eligibility for the 30% measure

5. Budget for the refund's actual receipt

Under the general method, ¥800,000 of output tax and ¥2 million of properly deductible input tax give a starting refund calculation of ¥1.2 million. But investment multiplied by 10% is not a reliable refund estimate. Establish taxable status for the relevant period, domestic versus overseas transaction treatment, invoice retention and the credit method first. Including payroll or exempt transactions in one investment total can substantially distort the forecast.

Electing taxable status has deadlines: normally the day before the relevant period begins, with a period-end exception for a new business. Following election, a business generally cannot return to exemption for two years, and certain fixed-asset acquisitions can extend the restriction. NTA: New businesses and corporationsCompare later sales growth and payments as well as the refund year.

Use separate cash-flow lines for customer receipts, expense and equipment payments, and tax payments or refunds. An expected refund is not available on the same day as a customer's payment. Allow cash to cover payroll if preparation or verification delays the refund. Overseas SaaS and advertising transactions are addressed separately in our article on consumption tax on digital services.

Rules and sources checked as of October 31, 2026. Numerical examples are illustrative assumptions.