Japan raises tobacco, corporate taxes to finance boost in defence spending

TOKYO – Japan on April 1 raised tobacco and corporate taxes to finance a boost in defence spending, with an income tax hike set to follow in 2027 as the government projects the tax increases will add some 1.3 trillion yen (S$10.5 billion) annually in revenue.

As the security environment surrounding Japan deteriorates and the government is set to further beef up the country’s defence capabilities, the public is likely to face further tax burdens to finance the defence outlays, which have now ballooned to a record-high nine trillion yen a year.

From April 1, the government added a surtax of 4 per cent after deducting five million yen from the corporate tax amount. The measure, estimated to raise tax revenues by 869 billion yen, will exclude small and mid-sized businesses with small incomes.

For heated tobacco products, the government is implementing a two-stage tax hike starting April 1 and again from October, aligning it with the rate for conventional cigarettes, which is currently higher. It will then raise the tax rate for both heated and conventional cigarettes from April 2027 in three stages, hiking it by 0.5 yen per stick. The increases are set to expand tax revenues by 212 billion yen.

As for income tax, the government will charge an extra 1 per cent from January 2027 to secure 256 billion yen. However, that increase will be offset by a 1 per cent reduction in a special income tax currently levied at a rate of 2.1 per cent to fund reconstruction efforts following the March 2011 earthquake and tsunami disaster.

But the total financial burden on the public will ultimately grow as the taxation period for the special income tax for reconstruction will be extended.

The series of defence-related tax increases was decided in response to a new security strategy compiled in December 2022 that includes a plan to cover one trillion yen annually by hiking taxes.

A record-high nine trillion yen was earmarked for defence spending for fiscal year 2026, which marks the fourth year of Japan’s five-year 43 trillion yen defence build-up plan.

Japanese Prime Minister Sanae Takaichi has been eager to raise defence and related spending, vowing to revise three security documents by the end of 2026. Under her government, Japan brought forward its goal of raising defence spending and related initiatives to 2 per cent of gross domestic product by two years, to fiscal year 2025.

The US, its key security ally, may also press Tokyo to boost defence spending after urging allies and partners in its national defence strategy document released in January to increase such outlays to 5 per cent of their GDP. KYODO NEWS