The government is eyeing raising Japan's tobacco tax as part of efforts to cover revenue shortfalls as a result of lessened rates to be introduced when it raises the consumption tax, sources close to the matter said on Tuesday.

The ruling coalition led by Prime Minister Shinzo Abe's Liberal Democratic Party staged a sweeping victory in Sunday's general election while pledging to boost spending on education and child care with funds to be secured from the consumption tax, which will be raised to 10% from 8% in October 2019.

But the government is also set to introduce lessened rates to soften the impact of the higher consumption tax on lower-income households by limiting the amount levied on daily necessities. The measure is expected to reduce revenues from the tax hike by around 1 trillion yen.

The government and ruling parties will soon start discussing the envisaged tobacco tax hike as part of annual tax reforms for fiscal 2018 starting next April. The draft reforms will be compiled by year-end.

It is unknown how much the government would be able to secure with the tobacco tax hike. When the country last raised the tax in 2010, state revenues increased by several hundred billion yen.

Revenues from the tobacco tax stood at around 2.2 trillion yen for fiscal 2015, while the number of smokers has been decreasing in the country partly due to tax increases in the past. The trend could affect the extent of the next tax hike, the sources said.

As for other alternative revenue sources, the government is also looking to increase taxes on incomes from financial transactions such as dividends on stocks and stock trading, the source said. 

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