The ruling Liberal Democratic Party's panel on the tax system launched a full-scale debate Nov. 26 on tax reform for fiscal 2008, aiming to compile a set of proposals including those on the consumption tax by around Dec. 13.

The LDP panel is expected to draw up its reform proposals after consulting with the tax panel of its junior coalition New Komeito party.

The Finance Ministry wants to raise the consumption tax partly to cover revenue shortfalls stemming from the scheduled increase in the ratio of the state burden in the basic pension plan from the current one-third to 50 percent in fiscal 2009.

However, the tax panels of the ruling parties, which have final say on key decisions on tax reform, are expected to oppose an immediate hike in the sales tax.

Since Prime Minister Yasuo Fukuda has already ruled out the possibility of raising the consumption tax in fiscal 2008 from the current 5 percent, how the LDP tax panel treats the issue in its recommendation deserves close attention, analysts say.

The key items to be discussed at the panel include measures to narrow regional disparities in terms of tax revenues, as well as a temporary tariff on special revenues for road construction. It will also discuss whether to scrap tax breaks for investors, which halve the tax rate on capital gains to 10 percent from 20 percent.

The break was introduced in 2003 to help stabilize faltering stock markets and was initially scheduled to expire in fiscal 2007, but the government extended it by one year, fearing a negative impact on stock markets. It is now considering when to revoke the tax breaks.