Korea to end tax cut on passenger cars sparks concerns of more moves

[Photo by Lee Seung-hwan]

South Korea has decided to end giving individual consumption tax cut on passenger cars starting next month, raising concerns that the government may speed up the normalization of the fair market value ratio of the comprehensive real estate tax and the phase out tax breaks on oil products.

According to sources from the government circle on Monday, there is even a considerable reaction of surprise within financial authorities at the decision to end the special tax cut on car purchases. The tax cut is a government tax support measure designed to help consumers save as much as 1.43 million won ($1,143) when purchasing a passenger car in order to stimulate the economy.

Although the tax cut is supposed to expire every six months, it has been continuously extended for five years since its introduction in July 2018, leading it to be accepted as permanent, rather than temporary, support measure.

The government has officially explained that it is time to end the flexible tax rate as the local auto industry is doing well and that the consumption environment is improving as the Covid-19 crisis wanes.

Officials from the financial authorities attribute the government decision to a recent decrease in tax revenue.

During the first four months of this year, tax revenue amounted to 134 trillion won, down 33.9 trillion won from a year earlier, according to government data. In a situation where this year‘s tax revenue shortfall became a fait accompli, the government is determined to withdraw tax support measures that are not absolutely necessary.

However, the fiscal authorities say that the tax revenue from the end of the cut in the individual consumption tax will be only around 500 billion won. In other words, it is not possible to expect a significant recovery in tax revenue just by ending the tax break.

In a related development, the government is currently considering returning the fair market ratio of the comprehensive real estate tax to 80 percent from 60 percent, the lowest limit allowed by law.

[Photo by Park Hyung-ki]

At the end of last year, the ruling and opposition parties at the National Assembly agreed to raise the basic tax deduction for the comprehensive real estate tax, lower the tax rate, and virtually abolish the heavy tax rate system for multiple home owners. In addition, as the publicly announced price of apartment houses has fallen by 18.6 percent this year, the justification for maintaining the fair market ratio of 60 percent has disappeared.

When submitting this year’s budget bill in the fall of last year to the National Assembly, the government predicted that its revenue from the comprehensive real estate tax would decrease by more than 1 trillion won this year in consideration of the reorganization of the comprehensive real estate tax system. On top of that, considering the drop in the official prices of houses announced this year, there is a possibility that the decline in tax revenue from the comprehensive real estate tax this year will increase to 2 trillion won to 3 trillion won compared with last year. In this regard, the normalization of the fair market ratio is believed to have the effect of partially reducing the decline in tax revenue.

The oil tax cut, which was extended until the end of August, has already lost its justification in the current situation. The extension of the oil tax cut came at a time when international oil prices rose to around $130 per barrel due to the war between Russia and Ukraine. However, the oil prices currently remain in the low $70s per barrel, leading the government to think that the actual benefit of maintaining the cut is not great.

The impact of the oil tax cut on tax revenue is significant, given that taxes reduced by the oil tax cut, including transportation, energy and environment taxes, amounted to 5.5 trillion won last year alone. However, the government is wary of viewing the normalization of the fair market ratio of the comprehensive real estate tax or the gradual end of the oil tax cut in conjunction with the termination of the cut in the individual consumption tax on passenger cars.

“The government makes an optimal decision on an individual case after comprehensively considering the situation at the time,” said a senior government official. “It is better not to link the comprehensive real estate tax fair market ratio or oil tax cut with the decision to end the special tax cut on car purchases.”