Three years after Japan introduced its Qualified Invoice System, the transitional relief for purchases from suppliers who cannot issue qualified invoices is starting to wind down. From 1 October 2026, businesses can recover only 70% of the Japanese Consumption Tax (JCT) on such purchases, down from 80%. The rate cut is modest on its own, but it arrives alongside a much lower cap and the staggered end of another relief measure, so the effective timing depends on your fiscal year-end.

Key takeaways

• The input tax credit on purchases from unregistered suppliers falls from 80% to 70% for purchases made on or after 1 October 2026, and will be phased out entirely by October 2031.
• The rate is determined by the date of the purchase, not the invoice or payment date.
• A new cap of ¥100 million per supplier (previously ¥1 billion) applies from the first taxable period beginning on or after 1 October 2026. For March year-end companies, that means from April 2027.
• The “20% special rule” for small, newly registered businesses ends with the taxable period that includes 30 September 2026. There is no extension for companies.

Background

Under the Qualified Invoice System, input JCT is creditable only if the buyer holds a qualified invoice from a registered issuer. Purchases from anyone else, typically small tax-exempt businesses and freelancers but also any business that has chosen not to register, would in principle carry no credit at all. To ease the transition, the government allowed a partial credit of 80% for the first three years. That window closes on 30 September 2026.

The phase-down schedule

Date of purchase	Creditable portion of JCT
1 Oct 2023 – 30 Sep 2026	80%
1 Oct 2026 – 30 Sep 2028	70%
1 Oct 2028 – 30 Sep 2030	50%
1 Oct 2030 – 30 Sep 2031	30%
From 1 Oct 2031	No credit

The original plan was a single step down to 50% in October 2026. The FY2026 tax reform replaced it with a more gradual path. Businesses using the simplified taxation method, which calculates input tax using deemed purchase ratios, are not directly affected.

Three points that are easy to get wrong

1. The purchase date drives the rate

The 70% rate applies to purchases made on or after 1 October 2026. The relevant date is generally when goods are delivered or services are completed, not when the invoice is issued or paid. Work completed in September but invoiced in October therefore still qualifies for 80%.

2. The ¥100 million cap is tested per taxable period

Where purchases from a single unregistered supplier exceed ¥100 million in a taxable period, no transitional credit is available on the excess. The cap applies from taxable periods beginning on or after 1 October 2026, so a March year-end company will first test it in the year starting 1 April 2027. It matters most for large, recurring contracts, such as store fit-outs or systems development, with a counterparty that has not registered.

3. The 20% special rule ends later than many assume

The 20% special rule allows businesses that became JCT-registered because of the invoice system to pay only 20% of their output tax. It does not end on 30 September 2026 itself, but with the taxable period that includes that date: the year ending March 2027 for a March year-end company, and the year ending December 2026 for a December year-end company. A new “30% special rule” is available to individuals only. Companies must move to either the general or the simplified method, and an election for the simplified method can be filed as late as the return due date for that first period. Even if your entity does not use the rule, some smaller suppliers may revisit their pricing as their own JCT costs rise.

What it means for luxury and other foreign-owned subsidiaries

Fashion and luxury businesses routinely engage freelance stylists, hair and make-up artists, photographers and interpreters for shoots and events, so purchases from unregistered suppliers are a recurring feature of marketing budgets.

The impact per transaction is small. On a fee of ¥1.1 million, including ¥100,000 of JCT at the standard 10% rate, the recoverable amount falls from ¥80,000 to ¥70,000, an additional cost of ¥10,000 or just under 1% of the fee. Across a busy events calendar, however, it will show up as a budget variance.

Non-recoverable JCT is a genuine cost. Under IFRS, non-refundable purchase taxes form part of the cost of the related asset or expense, so the change flows directly through to the P&L. It is better to reflect it in the current forecast than to explain it to headquarters as an unexpected variance later.

Finally, supplier discussions need care. Pressuring suppliers to register, or reducing fees unilaterally to offset the lost credit, may raise issues under Japan’s Antimonopoly Act and related legislation. Any change in terms should be agreed through genuine negotiation.

Action checklist

• Refresh supplier master data and reconfirm registration numbers for all suppliers flagged as unregistered.
• Add a 70% tax code to your ERP and expense systems, effective 1 October 2026, and continue to annotate the books to show that the transitional relief applies.
• Brief budget holders and expense submitters on the cut-off rule for work spanning September and October.
• Track annual spend with each unregistered supplier against the ¥100 million cap.
• Confirm, for each group entity, the last period eligible for the 20% special rule and the method it will use from the following period.

How we can help

The challenge in this reform lies less in the new rate than in its mix of timing rules: one change driven by the transaction date, and others driven by each entity’s fiscal year. We advise foreign-owned companies and the Japanese subsidiaries of luxury brands on accounting and tax, from implementing changes such as this one to explaining their impact to headquarters. If you would like to assess what this means for your business, please get in touch.

This article provides a general overview based on information published by Japan’s National Tax Agency and other sources as of September 2026. It does not constitute tax advice, and the treatment of specific transactions depends on the facts.
Reference: National Tax Agency, FY2026 Tax Reform: Qualified Invoice System (in Japanese)