Korea likely to gradually end temporary tax cuts as revenue expected to fall

Minister of Economy and Finance Choo Kyung-ho announces at the Pyeongtaek campus of Samsung Electronics Co. on April 7. [Photo provided by Ministry of Economy and Finance]

Attention is focused on whether the South Korean government will discontinue its temporary tax support measures as a drop is expected in tax revenue this year. It is urgent for the government to discontinue its temporary tax cuts to secure sufficient tax revenues, but protests expected following the end of the measures is burdensome for the government.

According to the Ministry of Economy and Finance on Monday, the Korean government expects its tax revenue this year to fall short of its target amount, “There is a high possibility of a drop in tax revenue this year,” said Minister of Economy and Finance Choo Kyung-ho during his April 7 visit to the Pyeongtaek campus of the world’s largest memory chipmaker Samsung Electronics Co.

Initially, the government projected the revenue for this year to be 400.5 trillion won ($303. 74 billion). However, its tax revenue shortfall in the first two months of this year is already estimated at 15.7 trillion won compared to the same period last year. Even if it collects the same amount of tax as last year’s from March to the end of the year, the shortfall is expected to reach 20 trillion won.

This is the first time that the country saw a shortfall of more than 10 trillion won in tax earnings compared to its target amount of tax revenue since 2014 when it saw a shortfall of 10.9 trillion won compared to the final target amount. Moreover, this is less than the total tax revenue of 395.9 trillion won based on last year’s national settlement. If this trend continues, this year‘s tax revenue will record a year-on-year decline for the first time in four years since a shortfall of 100 billion won in 2019.

It seems inevitable for the government to make more spending cuts. The government determines the items and scale of annual expenditures according to the pre-arranged tax revenue budget. If the amount of tax income decreases, the government has no choice but to tighten its belt and reduce spending.

In order to secure tax revenue stably in this situation, analysts pointed out that the government needs to discontinue the current temporary tax support measures it has in place.

[Photo by MK DB]

The government must first decide whether to extend its fuel tax cuts, which are set to expire at the end of this month. The measure has been in effect for three consecutive years this year, and the reduced taxes from the cuts in transportation, energy, and environment taxes under the measure reached 5.5 trillion won last year.

The government drew up this year’s revenue budget on the premise of maintaining the fuel tax cuts. Accordingly, discontinuing them can secure an additional tax revenue of more than 5 trillion won compared to the budget. The government is said to be considering gradually discontinuing the fuel tax cuts.

Currently, the government is offering tax cuts of 25 percent and 37 percent for gasoline and diesel consumption, respectively, and is said to be discussing lowering the diesel cut to match the gasoline cut or lowering both the gasoline and diesel cuts to 15 percent to 20 percent. The government is also considering discontinuing the longstanding consumption tax cuts on automobiles.

Earlier, the government cut the consumption tax on passenger cars by 30 percent from July 2018 to the end of 2019, and raised the cut to 70 percent in the first half of 2020 when Covid-19 spread. The government returned the cut to 30 percent in the second half of 2020, but extended the cut until June this year.

The government also needs to decide this year’s fair market value ratio of the comprehensive real estate holding tax by the first half of the year. Sources inside and outside the government say that the government is positively considering returning the ratio, which has fallen to an all-time low of 60 percent, to the normal level of 80 percent.

Some predict that the government, conscious of public opinions ahead of next year’s general elections, may maintain the ratio as it is, but in that case, the government’s collection of the comprehensive real estate holding tax this year will be smaller than the target amount as it prepared the budget on the premise of increasing the ratio to 80 percent. The government plans to revise relevant enforcement ordinances within the first half of the year taking the current situation into account.