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Saturday, Sep. 1, 2012
Doubling of the consumption levy may be kiss of death for small firms
For many small and midsize companies, the twofold hike in the consumption tax could spell doom, if they may find it difficult to completely incorporate the tax burden into the prices of their products and services, analysts say.
This will be particularly true for small manufacturers such as parts makers, they say, because the higher tax will push their operating costs higher, but their business partners — large manufacturers — might also be operating at the brink after cutting costs as much as possible to survive the economic downturn in recent years.
The fear of having their contracts canceled could also make the smaller manufacturers hesitant to raise product prices, and experts warn that the tax hikes may lead to more bankruptcies among small enterprises.
"In the end, we'll have no choice but to shoulder the burden ourselves," said 76-year-old Makoto Iwai, owner of precision machinery maker Iwai Seisakusho in Ota Ward, Tokyo. "I have expected as much."
Ota Ward is known as a hub for small and midsize manufacturers. With its state-of-art knowhow in lathe processing technologies, Iwai Seisakusho is prominent among those in the ward.
It makes a wide range of products, including control cylinders used to stabilize motions of bullet trains and parts that support cables on the Great Seto Bridge — the 13-km-long double-deck span connecting Okayama Prefecture and Kagawa Prefecture over the Seto Inland Sea.
While Iwai still gets an increasing number of orders from customers seeking his technical skills, operating profit remains stagnant due to the need for additional capital investments.
When the consumption tax is raised, prices of raw materials, special tools and cutters needed for the processing work will go up.
"But I just can't ask them (customers) to go as far as adding the extra tax burden for the tools to the price," Iwai said.
Major manufacturers that source parts from small firms like Iwai's are also facing difficult business conditions, given prolonged deflation and the sharp appreciation of the yen.
In 1997, the last time the consumption tax was raised, Iwai shouldered the added tax burden himself without shifting the cost to customers.
The tax, introduced in 1989 at an initial rate of 3 percent, was raised to 5 percent in 1997. The Diet enacted legislation Aug. 10 to raise the rate to 8 percent in April 2014 and to 10 percent in October 2015, mainly to help pay for swelling social security costs.
"When the tax is raised, there's nothing I can do but further slash costs," he said.
Iwai's situation is shared by similar companies in Ota Ward.
"I believe there are other things the government should do first, such as stop wasteful spending," the president of a sheet metal processing company said, expressing his discontent with the tax hike. "Isn't this in the reverse order?"
A survey conducted by Zenkoku Hojinkai, a public service nonprofit corporation promoting tax-related knowledge among businesses, indicates the smaller the firm, the more difficult the situation will be.
According to the group, nearly 65 percent of the 9,800 responding member companies said it will be "difficult" or "doubtful" that when the tax hits 10 percent they will be able to fully incorporate the burden into prices of their products and services.
Toru Fujimori, head of the information bureau at credit research agency Teikoku Databank, said micro enterprises will be directly hit by the tax hike — those who reflect the tax burden in their product prices may see poor sales, while those who do not and shoulder the burden themselves may incur deteriorated earnings.
"This could trigger an increase in bankruptcies," Fujimori said.