Korean gov’t mulls lifting inflation-linked taxes on beer, makgeolli

[Photo by Yonhap]

The South Korean government is considering abolishing the inflation-linked specific tax that has been fueling the price increase in beer and Korean rice wine takju, and entrusting the National Assembly with the authority to determine the tax rate.

According to the government on Sunday, the Ministry of Economy and Finance is pushing for an amendment to the liquor tax act aimed at abolishing the inflation-linked specific taxation for beer and takju as part of its tax law revision to be announced later this month.

A specific tax is a fixed amount of tax imposed in proportion to the quantity of alcohol or alcoholic beverages sold. Korea had been levying an ad valorem tax on alcoholic beverages based on price for more than 50 years since 1968. In 2020, however, the country introduced a per-unit tax for beer and takju in an effort to address tax inequality between imported and domestic beer and restore tax neutrality.

Yet, beer and takju taxes have increased every year in line with rising inflation, sparking an increase in alcohol prices.

For example, a 10 won ($0.01) increase triggered by a tax hike encourages the liquor industry to raise prices further, eventually leading to a 100-200 won increase in consumer prices.

“If there is a 15 won increase in the beer price based on the specific tax, (companies) will not just raise the price to 1,015 won from 1,000 won,” said Choo Kyung-ho, deputy prime minister and minister of economy and finance at a press conference earlier. “Rather, it can spark greater increase in consumer prices.”

In this context, the government plans to revise the liquor tax law to scrap the existing linkage to inflation, which mechanically raises liquor taxes every year, and prepare a new taxation method to replace it.

Under the new tax system, liquor companies will not be given the incentive or excuse to raise prices and inflation will be appropriately reflected in equity with other items that are subject to ad valorem taxes. One of the measures under consideration is using the new system as a policy measure by delaying or minimizing the increase in liquor taxes when needed to contain inflation.

The Economy Ministry is leaned toward granting the National Assembly full discretion over taxation. The idea is to allow the National Assembly to decide on the appropriate amount of taxes through discussions whenever necessary instead of having a fixed period for tax hikes.